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The Federal Reserve increased rates by a quarter of a per cent, as widely expected, and flagged “some further gradual increases” ahead. The Fed is now forecasting two rate rises next year, down from the three it had predicted in September, but financial markets had been expecting an even more cautious tone.
The Australian dollar took an immediate dive against the US dollar, briefly falling below 71 US cents for the first time since the start of November. It has also lost ground against the euro, the British pound and the Japanese yen.
Stocks on Wall Street initially plunged on the announcement and then oscillated between gains and losses in volatile trade, before turning firmly negative. The Dow Jones index closed down 351 points after being up by a similar amount earlier in the session. “It wasn’t a totally dovish hike,” said Subadra Rajappa, head of US rates strategy at Societe Generale. “The fact that they retained the language around ‘gradual’ I think confirms the current monetary policy stance, which the market was hoping would turn a little more data dependent.”
The Fed also confirmed it would continue to withdraw quantitative easing, reducing its balance sheet by $US50 billion each month. “Tightening liquidity and money supply — while the US and global economies are decelerating — is not really a cocktail that thirsty market participants wish to drink at the office holiday party,” said BNY Mellon strategist John Velis.
The move is expected to anger US President Donald Trump, who earlier this week tweeted that a hike would be “yet another mistake” by the Fed. Speaking following the decision, Federal Reserve chair Jerome Powell said the US economy continued to grow at a strong pace, with low unemployment and stable inflation. “Despite this robust economic backdrop and our expectation for healthy growth, we have seen developments that may signal some softening relative to what we were expecting a few months ago,” he said. Mr Powell noted moderating growth in other economies and increased market volatility but said those developments “have not fundamentally altered the outlook”.
Australian share market set to follow Wall Street
The Australian share market looks set to follow Wall Street’s weak lead, with ASX SPI 200 futures reversing earlier gains. The next major event likely to move the Australian dollar is jobs figures due out at 11:30am (AEDT).
Market expectations are for the unemployment rate to have remained steady at the six-and-a-half year low of 5 per cent in November. “While the Australian employment report will add some volatility on the day, we think global factors will continue to drive the AUD weaker,” said ANZ economist Felicity Emmett.
