The Fed has raised key rates by 0.25% and has also signaled its intent to continue raising rates till rates reach 1.37% by 2016-end.
Lower US GDP growth projections and inflation notwithstanding, Federal Reserve (Fed) has decided to finally end its 7-year zero rate policy. The Fed has raised key rates by 0.25% and has also signaled its intent to continue raising rates till rates reach 1.37% by 2016-end. If analysts’ estimates about impact of rate hikes are to be believed, then the US government could be paying an additional $3 trillion in interest over the next 10 years.
But it will be wrong to expect any immediate effect of this rate hike. It takes time for policy actions to show their affect and impact future economic outcomes. Though Fed has made it clear that it wants to raise rates further, the actual path taken by the rates in future will depend on the immediate economic scenario at the time of Fed meets.
The rate hike has also brought an end to the prevailing uncertainty about Fed’s decisions and how it will impact rest of the world. Experts feel that long-term treasuries and corporate bonds will witness renewed interests. As for the US trading partners, the countries that are large exporters to US and have low domestic inflation are expected to benefit from rate hike. Commodities are expected to be largely unaffected from this small rate cut. But if rates continue to rise further, then it will start having visible impact on commodity prices as well.
Markets do not seem to be surprised by Fed’s move and in essence, had resorted to their own ways of tightening the expected monetary policies. Indian markets have had already been through big sellings by foreign investors. Since selloff was primarily in large-cap stocks where foreign investors had large holdings, major indices have been falling quite steeply in recent months. But with uncertainty over, investors will take a fresh look at emerging markets, which still offer better return potential than current Fed-hiked US rates.
But it will be wrong to expect any immediate effect of this rate hike. It takes time for policy actions to show their affect and impact future economic outcomes. Though Fed has made it clear that it wants to raise rates further, the actual path taken by the rates in future will depend on the immediate economic scenario at the time of Fed meets.
The rate hike has also brought an end to the prevailing uncertainty about Fed’s decisions and how it will impact rest of the world. Experts feel that long-term treasuries and corporate bonds will witness renewed interests. As for the US trading partners, the countries that are large exporters to US and have low domestic inflation are expected to benefit from rate hike. Commodities are expected to be largely unaffected from this small rate cut. But if rates continue to rise further, then it will start having visible impact on commodity prices as well.
Markets do not seem to be surprised by Fed’s move and in essence, had resorted to their own ways of tightening the expected monetary policies. Indian markets have had already been through big sellings by foreign investors. Since selloff was primarily in large-cap stocks where foreign investors had large holdings, major indices have been falling quite steeply in recent months. But with uncertainty over, investors will take a fresh look at emerging markets, which still offer better return potential than current Fed-hiked US rates.
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