April 26, 2018

Asian shares fall after Fed rate hike, tracking Wall St lead

19 June 2017, 02:40 | Kenneth Drake

For savers? Rates should creep up, at least for the highest-yielding CDs and saving accounts, though on average they'll still pay a pittance.

Yet in its statement announcing the rate hike, the Fed curiously gave as one of the excuses that "household spending has picked up in recent months".

COMMODITIES: Oil futures plunged after the US government said oil supplies shrank slightly last week and gasoline stockpiles grew.

The Fed's preferred measure of underlying inflation has retreated to 1.5 percent, from 1.8 percent earlier this year, and has run below the central bank's 2 percent target for more than five years.

Leila Butt, Senior Economist at Prudential Portfolio Management Group: "As anticipated, the Fed has hiked rates for the second time in 2017 and we'd expect it to do so again before the year is out, as it also begins to shrink its balance sheet".

Consequent to the late-night United States rate hike, the Asian markets traded broadly in the red and eroded Indian investors' confidence in the highly expensive conditions in the domestic stock markets. "When you have a shortage of supply of something, its price will go up", says Gad Levanon, chief USA economist at the Conference Board, a business-supported research group.

With targeted rates now one full percentage point above where they were when existing monetary policy swooped in to pull the USA economy out of the 2008 crisis, some local bankers say there could be new opportunities for penny-pinchers who have been punished through almost a decade of historically low interest rates - they've just got to know where to look. That's hardly good enough to justify a rate increase in normal times. Indeed, based on the so-called "dot plot" median estimates of Fed policymakers, rates will keep rising until they reach 3% in 2019. He also heads a company responsible for a product that tracks rates in local markets and lets bankers quickly determine whether a customer can break with the terms of an old CD and still come out on top in a new one. However, even with a policy rate corridor of 1.0% to 1.25%, the real policy rate remains below inflation. According to their forecast, there will be one more rate hike this year, and three more next year. It actually fell for most of 2016, then jumped later in the year and peaked at 4.44 per cent in mid-March this year.

Fed officials have concluded that the economy, now entering its ninth year of expansion, no longer needs the ultra-low borrowing rates they supplied beginning in the Great Recession.

But some of the developments surrounding the Fed's latest hike were perverse. The economy still has a lot of room to grow, actual unemployment is much higher than it appears, and inflation is not a huge problem.

The 10-year U.S. Treasuries yield had slipped to as low as 2.103 percent and last stood at 2.129 percent. But the Fed also laid out a plan to reduce the overall size of its balance sheet. That buying pressure holds down Treasury rates.

That looming decision, and the rate hike south of the border, has Samure and his partner thinking about how to scale back their dream home. In Britain, the Bank of England saw three of its eight rate-setters vote for a rate increase, a fact that suggests a hike is much closer than many investors had expected.

Mortgage rates are still very low by historical standards.

Fixed-rate mortgages, the most common in Canada, are tied to long-term Canadian bond prices, which are in turn tied to USA bond prices.

Q. How could the Fed's actions affect other countries around the world?

The dollar rose to its highest in more than two weeks as solid readings on the USA economy helped strengthen the case for the Fed to continue tightening. In short investors are unsure whether future rises will be forthcoming, and if so how many of them there might be.

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