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Quick takes: The Fed delivered but inflation expectations did not justify liftoff

The US Federal Reserve announced on Wednesday its first interest rate hike in almost a decade, signaling the US has finally moved beyond the 2008 crisis.

The US Federal Reserve announced on Wednesday its first interest rate hike in almost a decade, signaling the US has finally moved beyond the 2008 crisis.

Its policy-setting committee raised the range of its benchmark interest rate by a quarter of a percentage point to between 0.25 per cent and 0.50 per cent.

Here are some economists' comments:

John L. Bellows, Ph.D, a Portfolio Manager and Research Analyst, Western Asset Management:

"The Fed did exactly what everyone expected. The markets were ready. The 25 basis point hike was already priced in. Had they not raised it would have been very confusing to the markets, given the fairly clear communications they had been providing. But they delivered."

"Recent FOMC forecasts had four hikes in 2016, once per quarter. We expect they will hike at a somewhat slower pace, likely skipping at least one quarter. The Fed does not want to be overly predictable, which Chairman Greenspan was criticized for in the 2004 cycle. The obvious way to deviate from a mechanical hiking path is to skip a quarter."

"The March meeting is probably too early, but perhaps in June or September, when it will be more clear that growth and inflation are coming in under the Fed's expectations."

Francis A. Scotland, Co-Director of Global Macro Research and Portfolio Manager of Global Macro Strategy, Brandywine Global:

"Collapsing commodity prices and rising credit spreads usually spurs the Fed to ease. The Fed has dismissed these developments, relating them to the shakeout in energy and temporary effects of a strong dollar. To us they are important risk factors warning against a premature lift off. The business cycle is still not normal and profit growth is stagnant."

"The risk is that the rate increase proves premature and subsequent hikes go too far, too fast. The world economy has been slowing steadily since early 2014, with signs of deflationary pressure. Last year the dollar rose faster and further than any comparable period since the float. It has contributed to wider credit spreads, falling commodity prices and a manufacturing recession."  


"Overall, we judge the Fed outcome to lead to lower Fed-related risk premium in the weeks and months ahead. Not only are future Fed-hike expectations likely to remain anchored, the uncertainty about how the Fed would begin hiking and what it would mean for market functioning should also fade. This should set us up for decent gains going into 2016 - helped further by stabilisation in China growth metrics, and as oil price volatility reduces from extremely high levels."

Ben Knight, economist, Warwick Business School, UK:

"The rise in the US base interest rate represents an expected change in US monetary policy which will slowdown the US economy a touch and strengthen the dollar due to the attraction of US financial assets for global investors."

"Any slowdown will hit the exports of countries like the UK for which the US is a big customer. However, the rise in the US dollar will have the opposite effect because it improves the competitiveness of imports into the US market. The direct effect on US GDP growth is generally larger, but offset to some extent by the rise in the dollar so the overall effect on exports and global GDP growth rates outside the US will be small but observable. However, if the rate rises continue and become larger, the downside impact in advanced economies will be more serious."

"Even in the short run a large capital outflow may cause large falls in exchange rates of some developing economies who may be forced to raise their own rates of interest to contain this flow and to limit the higher inflation rates caused by the fall in their exchange rates. This rise in rates in countries like India will reinforce the 2015 global slowdown in 2016."

Andrew Swan, head of Asian equities, BlackRock:

“The Fed has delivered exactly on expectations: A hike and the start of normalising monetary policy but with a dovish commentary. The well-behaved nature of bond and equity markets overnight speaks to the Fed delivering on expectations for now. Economic numbers especially US wage data will now determine the steepness and speed of the rise.”

Keith Wade, chief economist and strategist, Schroders:

“As anticipated the Fed raised interest rates for the first time in nearly a decade, but the risk lies in the market’s expectations of a “slow and low” rate hiking cycle. The Fed and chair Janet Yellen remain committed to a gradual tightening, but the danger is that if they are perceived as being more hawkish than the very low expectations built into markets, then the US dollar will strengthen and push down inflation further. In this way the normalisation of interest rates could stall as the currency markets tighten policy for the Fed.”

Bernard Aw, market strategist, OCBC Investment Research:

“So, the deed is done. After months – if not years – of anticipation, the Fed finally decided to hike its policy rate overnight. For good measure, chairwoman Janet Yellen continued to reassure the market that, post liftoff, the rate hike cycle will remain gradual – even if the median 2016 rate projections remained at 1.4 per cent, the same as September. This suggests as many as four hikes next year, more than the 2-3 times that futures market has been pencilling in. At the end of the day, the rate path will remain data-dependent, as emphasised by Yellen in her press conference. In some ways, that’s for later. For now, market can heave a sigh of relief that it has all gone smoothly thus far.”

Kevin Logan, chief US economist, HSBC:

“For the first time in over nine years, the FOMC (Federal Open Market Committee) raised the target range for the federal funds rate by 25 basis points. Forward guidance in the policy statement was changed to indicate that the committee expects to follow a "gradual" path for rate increases. In addition, the conditionality for rate hikes is changing: the labour market has been de-emphasised and more attention will be focused on actual and expected changes in inflation. Changes along these lines were generally expected, in our view, since they had been foreshadowed in speeches by Fed chair Janet Yellen. The general move down in individual projected levels for the federal funds rate in each of the next three years (known as the "dots") reinforces, in our view, the "dovish" tilt to the outcome of this policy meeting.”