The US Federal Reserve on Thursday raised the benchmark interest rate by a quarter percentage point as expected, citing an improving economy with one month to go before President-elect Donald Trump takes office.
What is US Fed Reserve?
Like in India we have Reserve Bank of India (RBI), likewise in US the central bank is The Federal Reserve System. The Federal Reserve conducts these important role:
# Conducts the US monetary policy to promote maximum employment, stable prices, and moderate interest rates in the U.S. economy.
# Promotes the stability of the financial system and minimize systemic risks by active monitoring
# Promotes the safety of individual financial institutions.
# Fosters payment and settlement system safety and efficiency through services to the banking industry and the U.S. government that facilitate U.S.-dollar transactions and payments; and
# Promotes consumer protection and community development through consumer-focused supervision and examination, research and analysis of emerging consumer issues and trends, community economic development activities, and the administration of consumer laws and regulations.
Fed reserve hikes rate
US Federal Reserve on Thursday raised the benchmark interest rate by a 25 basis points from 0.5 to 0.75, citing improvement in US economy with one month to go before President-elect Donald Trump takes office.
When did Fed last hiked rate
This is second rate hike in a decade. The rate increase from the previous range of 0.25 to 0.5 per cent is the first hike since December 2015.
Fed rate hike impact on Indian Market
According to market expert ,Avinash Gorakshakar, Fed rate hike will cast negative impact on indian markets. Foreign institutional investors (FIIs) have been selling holdings in the market post demonetisation, now after this rate hike experts believe that FIIs will be on selling spree. Money market and equities may come under pressure and bond yields may rise with the higher number of rate increases by Fed in 2017. Further, dollar outflows could weaken the rupee, compelling RBI to refrain from cutting interest rates. With crude prices rising as OPEC decided to chop oil output , a weak rupee will inflate the import bill and increase government’s finances.
Impact on US
The Fed rate hike can increase housing, cars, student loans and even the interest on credit card. The economic outlook is highly uncertain, and participants will adjust their assessments of the appropriate path to the federal funds rate in response to changes to the economic outlook and associated risks, Yellen said.
Soon after the Fed rate increase announcement, Dow took a 207 point dip.
Responding to questions, Yellen emphasised that this is a very modest adjustment in the path of the federal funds rate, and involves changes by only, some of the participants.
The other key data focus for Fed policy, unemployment, is forecast to remain steady at around 4.5 per cent through 2019, from 4.6 per cent currently. But the majority view had been that there was a greater
risk of jeopardizing the fragile US recovery by moving too soon, especially amid global uncertainties including the slowing of China’s economy and Britain’s vote to leave the European Union.
In addition, signs of inflation or wage pressures were absent from the economic data. But the FOMC notes that inflation has been kept low in part due to the decline in energy prices, which could prove to be temporary.
Fed future targets
Many analysts expect the central bank will have to raise rates faster if Trump's promised infrastructure spending and tax cuts fuels faster inflation. "In light of the current shortfall of inflation from two per cent, the Committee will carefully monitor actual and expected progress toward its inflation goal," it said. In their economic projections, Fed officials project three rate increases in 2017, putting the rate at 1.4 per cent at the end of the year. It would then rise at the close of 2018 to 2.1 per cent. They project inflation will not hit the 2.0 percent target until 2018, falling just shy of the mark next year.