Pop Goes the Fed Rate

“The most direct impact will be felt in those economies that have high external financing needs relative to their foreign exchange earnings and reserves”, the report said.

“We have confidence in the robustness of the economy and its resilience to shocks”, the Federal Reserve chief said during a press conference on Wednesday. “In the near-term horizon of the next year or two, the rate increases are helpful to the health of the banking industry”.

Hence the key messages from Yellen on Wednesday were that rates will continue to rise but at a cautious pace. That’s because it can now begin providing products that have more variability based off customer needs because banks are less restricted from an economy that appeared to be stagnant, and the market will push them to do so. China’s central bank also raised borrowing costs this week and the Bank of Japan left its monetary policy setting unchanged. “Because we know it’s going to be dynamic now, it’s not going to be static for awhile”.

The US Fed slashed rates to zero in 2008 in the wake the financial crisis and kept it at that level throughout the period of major economic slowdown that followed.

The U.S. economy added 235,000 jobs in February and the unemployment rate edged down to 4.7 percent, a level consistent with Fed’s projections of full employment, according to the Labor Department. The last one before that was in 2015. “Since the Fed rate hike is not expected to create much volatility in the Indian markets, this should have minimal influence on RBI’s policy stance”, the chamber said in a statement.

Before that, the widespread view was that the Fed will raise rates three times this year beginning in June after assessing the effects of tax cuts and other stimulus measures Trump pledged to take. If the aim was to deliver a rate increase without abruptly causing tighter financial conditions (code for declining equity and credit markets), then it was mission accomplished.

The Fed’s projections also saw the USA economy growing by 2.1% in 2017, unchanged from its December forecast. On the ground right now, the fact remains: The economy shifted down a gear just as the Fed tightened the monetary policy noose. She also highlighted some estimates which suggest this neutral real rate is now close to 0%.

A U.S. rate hike at this point would serve as a signal that the financial markets are on track to more normal conditions after a prolonged period of abnormally low rates following the Global Financial Crisis.

“Compared to market expectations the statement was seen as fairly neutral, with the only “hawkish” aspect – apart from the hike itself – being slightly more number of officials seeing three or more hikes in 2017, versus two”.

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