Second increase in 10 years
Markets rise after US Fed lifts interest rate
Dollar rises on news
London’s leading share index burst back through 7,000 today as financials rose in response to the US interest rate rise.
The US Federal Reserve is raising its main interest rate by 0.25% and expects the pace of rate rises to accelerate.
It said 2017 could see three rises rather than two – taking rates this time next year to 1.4%, rather than the 1.1% forecast in September – and prompted demand for dollars.
It is the first rate move since last December and only the second since June 2006.
In London, Royal Bank of Scotland was the second highest riser, up 4.8%, with Barclays also higher as the FTSE100 traded at 7,004, up 55 points, in the last half hour of trading.
US markets opened higher. The Dow Jones Industrial average was up 35.94 points, or 0.18%, at 19,828.47. The S&P 500 rose 3.07 points, or 0.13% at 2,256.35. The Nasdaq Composite was up 8.16 points, or 0.15%, at 5,444.83.
The Fed chairman Janet Yellen yesterday issued her first commentary on the economy since the election of Donald Trump as US president.
She said the decision to raise rates to 0.5-0.75% should be seen as a reflection of the “confidence we have in the progress the economy has made” and “our judgement that this progress will continue”.
The economy has proved to be “remarkably resilient” and this rate rise and the three expected next year are a “vote of confidence in the economy,” she added.
She also said that the rise had been widely expected and she expected it to have a relatively small effect on markets.
In a statement which followed a two-day meeting, the central bank said: “In view of realised and expected labour market conditions and inflation, the committee decided to raise the target range.
“Job gains have been solid in recent months and the unemployment rate has declined.”
Yields on short-term US debt surged to the highest since 2009, sending the dollar to peaks not seen in almost 14 years, which in turn prompted China to set the yuan at its weakest level against the greenback since 2008.
Gold hit its lowest level in more than 10 months and oil prices also declined. Brent crude futures dropped to $53.87 per barrel, but ticked up this morning to $54.02.
David Lamb, head of dealing at Fexco Corporate Payments, said: “With the Fed predicting that the US economy will continue creating jobs at its current prodigious rate and the rate hike escalator underpinned by an expectation of rising inflation, dollar confidence is riding high in the countdown to the start of the Trump presidency.
“The Dollar is set to end 2016, and the Obama presidency, in buoyant form.”
Nancy Curtin, chief investment officer at Close Brothers Asset Management, said: “The decision to raise rates for just the second time in a decade was a forgone conclusion following the US economic recovery since summer that culminated in positive jobs figures last week.
“As Trump takes office we are likely to see a swing towards fiscal stimulus, building economic momentum which will only give the Fed greater scope to hike rates further in 2017.
“However, the outlook is still finely balanced. Though unemployment is at a nine year low, wages and the participation rate have recently come in flat, which should give some reason for caution.
“The economy is not yet firing on all cylinders. This trend will likely be observed closely in the New Year, particularly if inflation continues to run below its 2% target, and we might expect Yellen to look for more sustainable labour market improvements before further rises.
“Nevertheless, given the wait for a rate rise, today’s move should be seen as a vote of confidence in the US economy.”
Nigel Green, chief executive of DeVere Group, said: “Investors are likely to favour the dollar over other currencies, since higher Fed rates will attract overseas capital into the US and favour those sectors that will most likely benefit from the Trump stimulus and de-regulation that he has promised.
“Investors who are well prepared and properly advised can look to build wealth as we move beyond the era of very low rates and inflation.”
Tom Stevenson, investment director for Personal Investing at Fidelity International comments: “What does this mean for UK investors? There is no official connection between the US and UK interest rates but many believe the Bank of England will be the next central bank after the US to raise rates.
“However, while inflation has risen more sharply than expected in the UK, I don’t expect UK interest rates to be raised in 2017. It is likely that the Bank of England will keep rates at 0.25% to support growth as Brexit negotiations get under way.
“UK investors are therefore likely to continue to find solace in shares over cash.”