The Fed finally raises rates

By GKFX Team  |  15/12/2016 10:22

The Fed acted to raise interest rates at yesterday’s FOMC by 0.25% to leave the base rate at 0.75%, the move was of course widely expected by the markets, however has still caused some aggressive downside on equity markets and strength in the US dollar. It was more the guidance on rates that has caused the aggressive downside as Janet Yellen predicted 3 more rate hikes in 2017 and hinted that the guidance was due to the potential change in fiscal policy adopted by incoming President Donald Trump.
 
However we must take Yellen’s comments with a pinch of salt. The markets expected the Fed Chair to announce two rate hikes in 2017, but we must remember that she also predicted 4 rate hikes in 2016 when we only got one! Market turmoil has been a reason for the Fed not raising before yesterday’s meeting and with such a volatile year you can see why that may have been. But looking towards 2017, there are as many huge stories that could derail markets, and therefore the Fed’s policy, with Donald Trump’s inauguration, Article 50 and Brexit, and French and German elections markets could be incredibly volatile.
 
Janet Yellen stopped short of telling us that it was Donald Trump personally that has influenced the Fed’s decision, however the hints were strong ones as she told us that potential changes in fiscal policy would mean that growth and inflation could pick up, therefore pointing to the need for higher interest rates.
 
The market reaction was an interesting one, as traders had been waiting for a move through the 20,000 level on the Dow Jones, but despite a move to the upside the break never happened. Instead the Dow topped out at 19,965 before falling back down to lows of 19,746, with that range now looking to establish itself.
 
EURUSD was the other big mover over the figure as we saw a sell off as US dollar strength took over. We have now set new lows at 1.0468 but the major downside level is now at 1.0460, if broken this key level could see us all the way back to parity as the dollar remains strong in the wake of the hike. We finally got a text book economic reaction to the rate hike with equities selling off and the currency rising, whether this will be the case as we go through 2017 is yet to be seen.