The US Federal Reserve has bumped up interest rates by 25 basis points, but the move was widely expected by markets and all eyes are now on the speed and size of future increases.
The Federal Open Market Committee (FOMC) said the rise of the US federal funds rate from 0.75% to 1% was driven by strong jobs data and forecasts that inflation is heading towards its target of 2%. This is only the Fed’s third rate hike since the financial crisis.
Government bond yields fell on the announcement, with the 10-year US Treasury yield dropping below the psychologically-important level of 2.6% to trade at 2.52%. The dollar also weakened with the dollar index falling 0.9%. Elsewhere, US and global equity indices moved higher.
Closer to home, the FTSE 100 broke a new record in early trading on Thursday by hitting 7,440 points.
No alarms and no surprises
But the US rate rise came as no surprise to a market that had already priced-in an increase. Earlier this week, Fed funds futures were reflecting the chance of an increase in March to be in excess of 90%.
Industry attention is now diverted towards when and by how much rates will rise in the future, something Fed chair of the board of governors Janet Yellen appears cautious about.
Yellen said the FOMC would assess the path of rate increases based on economic conditions relative to its objective of maximum employment and 2% inflation. This, she added, will include taking into account labour market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
“The committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run,” the FOMC said in a statement. “However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”
According the Fed’s dot-plot which charts the FOMC member estimates of fed funds levels in the coming quarters, the median view remains unchanged from December 2016; that is for two more hikes this year and a further three in 2018. The next likely rise is expected to be in June.
