Main Menu

Fed raises interest rate in move to ‘normality’

Janet Yellen vidThe Federal Reserve raised interest rates by 0.25% in what was seen as a reflection of the robust health of the US jobs market.

It is the first time US rates have risen since 2006 and will trigger speculation about a rate rise in the UK.

Analysts believe this is the first in a series of US rate rises and that the UK will probably make a move in the first half of next year, probably in May.

In the meantime, the dollar is likely to rise, making exports to the US more attractive.

Asia’s main stock markets saw impressive gains, with the Nikkei index in Japan up 1.54% at 6am Thursday and the Hang Seng in Hong Kong rising 0.56%, while the ASX/S&P 200 in Australia closed up 1.5%.

Rain Newton-Smith, CBI director of economics,  said: “The move was widely anticipated and the consequences for the UK are likely to be small.

“Alongside the US, the UK has been one of the best performing advanced economies in recent years, but the Bank of England probably still has a way to go before rising inflationary pressures at home persuade it to follow and up interest rates.”

Rhys Herbert, senior economist for Lloyds Bank Commercial Banking, said: “This evening’s rate rise came as widely expected, but nonetheless is a significant acknowledgement of the progress that the US economy has made in recent years.

“Whilst the Fed has reinforced its message that subsequent rises will take place gradually, the FOMC’s interest rate forecasts continue to point to a faster rate of tightening than is implied by market pricing, leaving room for considerable asset price volatility if economic developments continue along the lines that the FOMC currently expect.

“How this gap between market and FOMC expectations closes will determine how financial markets behave over the coming year.”

Russ Mould, investment director at AJ Bell, said: “Markets like certainty and had already priced in a 0.25% rise in interest rates so the lack of a nasty surprise from the Fed will be reassuring after what seems like months of shilly-shallying, especially as chair Janet Yellen (pictured) is suggesting future increases will be slow and gradual.

“The fact that Yellen suggests rates may not reach normal levels for sometime does warn that there is work to be done and strong progress in US benchmark indices should not be taken for granted in 2016, especially as a higher dollar and increases in corporate borrowing costs on the bond markets are tightening monetary policy with or without the Fed.”

The dollar fell against the euro and then rallied as the Fed decision was released and investors judged that further gains in the dollar look likely in 2016, especially as the Fed moves toward tighter policy.

Mould added: “A stronger dollar has historically been negative for emerging markets, which have been under the cosh this year, and investors may remain wary of these developing arenas, at least until greater visibility of Fed policy for 2016 begins to develop.”

James SprouleJames Sproule (right) , chief economist at the Institute of Directors said: “The Federal Reserve’s decision to start normalising interest rates is a welcome sign of the central bank’s confidence in the US economy. For Britain, higher US interest rates give the Bank of England the flexibility to start normalising rates on this side of the Atlantic as well.

“Since the Fed has acted first, it diminishes the possibility of an increase in UK interest rates upsetting the value of the pound against the dollar – just one more obstacle which could have worried the Bank.

“While inflation is clearly way off the Bank’s 2% target, the Monetary Policy Committee must look past this temporary period of low inflation and act soon. Interest rates still need to be normalised, not to tame rising prices but to take away monetary stimulus which has done its job to spur growth, is no longer needed and could be leading to capital misallocation.

“There will always be a thousand possible excuses not to raise rates, but we must take account of the exceptional circumstances in which we find ourselves. We are probably close to peak employment in the UK, with employment growth set to plateau next year. All these factors should encourage rate-setters in the UK to think seriously about raising rates in early 2016.”

Neil Blake, Head of EMEA & UK Research at CBRE, said: “A decade in the making, the Fed’s vote to finally lift interest rates off their 0.25% base marks a watershed in the global economy.

“As well as bringing challenges for still indebted western companies and households, emerging market economies already suffering from the slowdown in China and commodity price weakness, will now face a triple whammy of falling export prices, a stronger dollar and the prospect of further US rate rises in the longer term.”

Positive news on jobs also helped encourage investors back into the market.

The UK unemployment rate fell to 5.2% in the three months to October from 5.3% the previous quarter, according to the Office for National Statistics.

In company news, Rolls-Royce rose almost 5% to 566.5p after chief executive Warren East unveiled a big management shake up.

Dixons Carphone jumped as the company reported first half underlying pre-tax profit rose 23% to £121m, beating analysts’ forecasts of £111m.

SuperGroup surged after reporting a 54.4% jump in pre-tax profits in the first half to £19.3m.

Sport Direct International’s shares dropped on the fallout over its staff’s pay and working conditions.

The FTSE100 closed up 43.4 points at 6,061.2.

Leave a Reply

Your email address will not be published. Required fields are marked as *

This site uses Akismet to reduce spam. Learn how your comment data is processed.