The Federal Reserve (Fed) announced its decision to increase interest rates by 0.25% to 0.50%-0.75% for the first time this year and right at the end of it. The highly anticipated decision on Wednesday was made only for the second time since 2008, and the Fed predicts three rate increases during next year instead of the two previously estimated.
Once again the Fed delivered some encouraging comments on the economy’s growth. The U.S. Central Bank’s Chairwoman Janet Yellen said that growth is a bit stronger together with employment levels. The overall progress in terms of inflation and unemployment has been considerable according to her, and she voiced the Fed’s expectations for the consumer price index to reach the target of 2% within the next two years. Interest rates were raised twelve months ago from the record low levels that were in place for a period of seven years. Since 2008, policymakers were working through the slow-moving recovery of the world’s strongest economy.
During her scheduled press conference following the interest rate decision, Janet Yellen was confident of more interest rate increases during 2017 than originally assumed. The Federal Open Market Committee (FOMC) might raise interest rates by 0.75% instead of 0.5% through a set of three increments.
The decision to increase interest rates was unanimously agreed to by the FOMC members, which is incidentally the first time they’ve been in consensus since the beginning of the year. The united agreement also came after the election of Donald Trump as the new president of the United States. However, the Fed did not voice any correlations between future economic growth and Donald Trump’s vows for reduction in taxes and investment in infrastructure.
The election of Trump at the beginning of November was followed by a surge in the stock markets to record highs, but on Wednesday U.S. indices fell after the interest rate increase news. The S&P 500 fell by 0.9% to 2,252.01 and the Dow Jones Industrial Average also decreased by 0.6% to 19,774.
The EUR/USD also fell on Wednesday by 1.1% to just above the $1.05 mark. On a weekly basis, the currency pair dropped by 0.9% and ended trading at $1.04495. Gold plunged to a 10-month low closing at $1.140 an ounce after the announcement. At one point it dropped below $1,139 not just due to the expected rate rise but also due to the hawkish comments from the Fed implying further rate hikes and soon.
Donald Trump is apparently not a fan of Janet Yellen as he mentioned a number of times in the past that the economy’s current state is “false” because the Fed did not move to increase interest rates earlier. He also questioned the Fed’s independency, so his comments imply that he is not likely to support the Fed Chair in extending her position when her term expires at the beginning of 2018. In the meantime, it remains to be seen what the Central Bank’s stance on the U.S. monetary policy will be from the New Year 2017 and onwards.
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