The Fed finally moves on US interest rates but will it stick to the 'dot' plot

Russ Mould, investment director at AJ Bell comments on the Fed’s decision to raise US interest rates.
14 December 2016

“The one-quarter point rate rise pushed through by the US Federal Reserve shows that confidence in the US economy is building and this is likely to ripple through to the global economy.  Rising US interest rates are likely to underpin the strong dollar which will continue to boost dollar earning UK listed stocks such as miners and oil and gas companies.  This would lend support to the overall UK market given their prominent positions in the FTSE 100.

“The key now is whether the Fed does a better job on following through on its “dot plot” in 2017 than it did in 2016.

“December’s increase represents just one rate hike for 2016, as against the four targeted 12 months ago, so it is interesting to see the Fed’s “dot plot” suggest that rates will reach 1.25% to 1.50% by the end of 2017 – a further three rate rises, one more than outlined after its November meeting.

“Such a trajectory will raise fears in some quarters that the US economy remains brittle, while others will argue the central bank risks getting behind the curve, given President-Elect Trump’s reflationary tax cut and spending plans.

“In the latter case, the market would not wait for Chair Janet Yellen to act, as bond yields and the dollar would likely rise further, potentially short-circuiting the Trumpflation rally in the process, although for the moment the combination of modest economic growth, restrained inflation and low borrowing costs could provide further support to the major US equity indices, which continue to set new all-time highs.”

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