The Fed raises rates

The Federal Reserve yesterday in-line with market expectations increased interest rates by 25bps to 1-1.25 percent range. It was the fourth such increase by the Fed since it initiated the process of normalizing interest rates in December 2015.

Before the meeting, the probability of rate hike had reached almost 100 percent according to the analyst and economists survey carried out by Bloomberg. The Fed over the last few years has mostly met market expectations and has tried to not bring in surprises.

The economic data, however, was not supportive of the hike before the meeting. The latest inflation figure in USA had dropped to 1.7 percent during May, which should have made the Fed chair Janet Yellen hesitant of raising the rates. In her press conference after the hike, she acknowledged low inflation data and was of the view that it would start to pick during the second half of the year.

Moreover, the decision to increase rates also comes on the back off some stability in other economies such as China. The Fed last year had adopted a wait and watch policy especially with Chinese economic conditions that were looking a bit messy. One year forward, and the situation is much better with Chinese economy showing no signs of a hard landing, while the troubled economies in Europe is also showing signs of recovery.

The Asian market in spite of predicting that the Fed would increase rates, opened lower. The downside was further augmented by the sharp drop in crude. Locally, here at the Pakistan Stock Exchange, the Fed rate hike was least of the worries for the traders as all eyes were focused on the Prime Minister’s visit to the JIT. According to market participants, there was some foreign selling in big index names, but it was considered to be part of the routine business.

Looking forward, the probability of the next rate hike has gone down especially with crude oil heading lower as that would keep the inflation numbers in check. On the other hand, the Fed is looking to trim down it balance sheet, which ballooned over all those years of quantitative easing. It would be interesting to see how the Fed conducts its business under current economic and political conditions.