The US Federal Reserve has raised interest rates by a quarter of a percentage point but left its rate outlook for the coming years unchanged even as policymakers projected a short-term acceleration in US economic growth.
The move, coming at the final policy meeting of 2017 and on the heels of a flurry of relatively bullish economic data, represented a victory for a central bank that has vowed to continue a gradual tightening of monetary policy. Having raised its benchmark overnight lending rate three times this year, the Fed projected three more increases in each of 2018 and 2019 before a long-run level of 2.8% is reached.
That is unchanged from the last round of forecasts in September.
“Economic activity has been rising at a solid rate ... job gains have been solid”, the Fed’s policy-setting committee said in a statement announcing the federal funds rate had been lifted to a target range of 1.25% to 1.5%.
Ahead of the rates decision, US stocks had moved higher but were off their session highs after Congressional leaders said they had reached a tentative agreement on a tax overhaul package.
The dollar dropped and Treasuries rallied following reports that a measure of US inflation fell short of estimates, only hours before the Federal Reserve’s made its decision on interest rates.
All major equity gauges in the US were up, led by makers of clothing and household products.
In Europe, the Stoxx Europe 600 Index slipped, with losses for utilities offsetting gains for retailers. On ‘Fed day’ in the US, the Dow posted a new record in the session, “as the market moves into higher gear ahead of the traditional Christmas rally”, said Chris Beauchamp, the chief market analyst at online broker IG.
The market next year will have to get used to new Fed chair Jerome Powell, Mr Beauchamp said. He added: “You knew where you stood with Janet Yellen, and while Mr Powell doesn’t seem like much of a departure, who knows how things will change once he gets his feet firmly under the desk?”
The FTSE 100 rose slightly, trading sideways as investors’ anticipation of a rate rise from the Fed drove financial stocks higher while high-yielding consumer stocks suffered. The prospect of rising rates in the US drove sector performance in London yesterday, boosting financials while dragging on housebuilders and consumer stocks.
“The market does seem to have rotated a little bit into HSBC and financials. It’s a little bit of an inflation trade coming back on with a return to the banks,” said Colin McLean, CEO of SVM Asset Management in Edinburgh. Financials were the best performers, led by HSBC, whose international footprint makes it easier for it to benefit from higher US rates. The stock was the strongest boost to the index.
Barclays and RBS also gained slightly. UK housebuilders, which have benefited from historically low-interest rates, fell by up to 1.4%. Barratt Development, Taylor Wimpey and Persimmon all fell. The gap between valuations of the FTSE 100 and US benchmark S&P 500 has widened strongly since the Brexit vote, analysts at Man Group found.
While this is partly down to US stocks becoming more expensive, it could also reflect investors’ Brexit anxiety, they said.
Irish Examiner, Reuters, and Bloomberg