The Federal Reserve increases rates

15 December 2016
For only the second time in a decade, the US Federal Reserve has increased its official cash rate.

It’s becoming an annual event; in December 2015 the Federal Reserve’s policy-setting committee decided to raise its target interest rate – known as the Fed funds rate – for the first time in nine years. In December 2016 it did it again. The target range for the federal funds rate is now between 0.50% and 0.75%.

In making the decision, the Committee noted that the labor market has continued to strengthen and that economic activity has been expanding at a moderate pace since mid-year. According to the Fed, job gains have been solid in recent months and the unemployment rate has declined. Household spending has also been rising moderately.
The Committee also left the door open for further increases in 2017, noting that it expects inflation to soon reach its target 2%.>Michael McCarthy, Chief market strategist, CMC Markets, called it ‘market-shifting news’ and predicted the Fed’s decision to result in a much larger than normal volumes of shares being traded on the ASX.
McCarthy also noted that an estimated three 0.25% rate hikes next year, foreshadowed in the Committee’s release,  is an advance on previous guidance.
“Higher inflation and interest rates and stubbornly low growth may make stagflation the word of the year,” he said.

Business and financial commentator Peter Switzer called the decision a ‘huge day for the world’, emphasizing that this is only the second rate rise in a deacde.
“If you want to know how scary the GFC was and how close we came to a Great Depression, then just think about that,” he said.

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