The US Federal Reserve last night raised interest rates by a further 25 basis points, its second hike of the year, but given the slowing economic data, investors are split on whether a third increase will be seen this year.
The Fed’s rate hike could also have a negative impact on exporters to emerging markets, as higher interest rates in the USA usually prompt global investors to move their funds from emerging markets, including China, to the United States, observers said.
They said they expected Fed policymakers to raise interest rates one more time by the end of 2017 and then three times in 2018.
The data had knocked the dollar and US bond yields to its lowest level in seven months against a basket of currencies. In Asia, Japan’s Nikkei 225 ended the day marginally lower. On the flip side, Yokohama Rubber is losing more than 4 percent, Sumco Corp.is down nearly 4 percent and TDK Corp.is lower by more than 3 percent.
The Fed said it expects US inflation to be at 1.7 percent by the end of this year, down from the 1.9 percent previously forecast. Stock and bond prices weakened after the Fed’s moves as some investors anxious that the actions would throttle back economic growth.
While the Fed still has another hike pencilled in for this year, a recent run of soft inflation data has left fund futures implying only a 40 per cent chance of a move by December. The dollar.DXY was largely flat against a basket of currencies after reversing earlier losses, while the price of gold fell. The amount of securities the Fed held on its balance sheet ballooned from less than a trillion dollars before the crisis to roughly $4-and-a-half trillion. The current unemployment rate and personal consumption expenditure suggest that the Fed target rate should be at 4.01 percent at the moment.
Near term risks to the economic outlook appear roughly balanced, but the committee is monitoring inflation developments closely. US shares looked set to open lower, with Dow futures down 0.3 percent and S&P futures off 0.5 percent.
Fed chairperson Janet Yellen said the move reflects progress made by the economy. The post-meeting statement said inflation “has declined recently” even as household spending has “picked up in recent months”. Long-dated Treasury yields though tumbled to their lowest since early November, thanks to the weak inflation and other economic data.
Brent crude settled down 8 cents at $46.92 a barrel, while US crude settled down 27 cents at $44.46, after touching a six-month low of $44.32 a barrel.
The dollar index was last down 0.06 per cent, while the euro remained unchanged at $1.1214.
The National Financial Supervisory Committee recently forecast the Fed rate hikes, but small increases each time would not insert significant pressure on exchange rates.