US Fed announces 0.25% rate hike

Novare’s Tumisho Grater

By Tumisho Grater, economic strategist, Novare Actuaries & Consultants

As expected, the U.S. Federal Reserve raised its target rate by 0.25% to a range of 0.75% to 1%. The Fed stated that “the labour market has continued to strengthen and that economic activity has continued to expand at a moderate pace.”

The Fed noted that although economic projections had seen very little changes from those in December last year, the central bank said that economic conditions are improving with business investment having firmed somewhat, while business sentiment is now at favourable levels. According to the Fed, job gains will continue to be solid (as seen in the recent nonfarm payroll numbers). Fed Chair Janet Yellen, reiterated that monetary policy would remain accommodative and that three rate hikes expected for the 2017 year is still considered gradual.

Yellen advised that a great level of uncertainty still remains regarding the nature and the size of the proposed fiscal policy by the Trump administration, and therefore have not discussed potential policy measures in detail. During the press conference she advised that she had met with the U.S. Treasury Secretary a few times and had a brief meeting with President Donald Trump, but shared no further details.

U.S. equites traded higher following the rate announcement, while the 2-year Treasury yield, which is more sensitive to monetary policy moves, came off its session highs to 1.33%, while the U.S. dollar weakened, adding to earlier loses seen before the rate announcement.

It appears that traders remain cautious about the rate outlook this year on the basis of lingering uncertainty with the Trump administration’s fiscal policy. The so-called “dot plot” (which refers to the Fed’s interest rate projections which calls for three hikes this year), may have registered as a disappointment for traders who were looking for a steeper tightening course.

At the close of the South African bell, markets finished 0.1% weaker ahead of the Fed announcement while the rand was trading at around R13.05. However, following the rate announcement the local unit strengthened by more than 2.5% against the U.S. dollar dipping below R12.85. The currency found support from the weaker U.S. dollar and the signal that the U.S. economy is strong enough to withstand a rake hike, which is positive for overall global growth.

END