Fed hints rate hike likely in December

TORONTO — North American stock markets edged higher Thursday as the U.S. Federal Reserve strongly hinted that an interest rate hike is likely to come in December.

Fed chairwoman Janet Yellen testified before Congress that signs of an improving U.S. economy has strengthened the case for a rate increase sooner rather than later.

She also noted that the risk of spurring a recession climbs if the central bank continues to wait to make a move and then is forced to raise rates too quickly later.

“This is a much stronger hint than ever given before,” said Peggy Bowie, a senior trader at Manulife Asset Management.

“Her guidance after that basically is, if they don’t make a move, I think she hinted that they could end up behind the curve. The near-term risk could be unbalanced and they would have to move faster.”

Investors have anticipated for months that the Fed would raise rates at its next two-day meeting starting Dec. 13, after the dust settles on the U.S. election results earlier this month. It’s expected that it will be a small increase of a quarter of a percentage point, from the current range of 0.25 per cent to 0.5 per cent.

The central bank last made a move on rates a year ago in December. It had forecasted multiple rate hikes in 2016, but economic data showed weak growth, forcing it to pause its plans.

On Wall Street, stock markets reacted favourably, with bank stocks seeing a sharp rise. Higher interest rates bode well for financial institutions who will earn more profits on loans.

The Dow Jones industrial average climbed 35.68 points at 18,903.82, while the S&P 500 advanced 10.18 points at 2,187.12.

Almost all of the S&P 500’s gains since the presidential election have gone to financial stocks. They lagged the market for much of this year, but they’re now trading at their highest levels since May 2008, months before the financial crisis peaked.

Investors hope banks will benefit from higher interest rates, faster economic growth and lighter regulation under U.S. President-elect Donald Trump.

The Nasdaq composite jumped 39.39 points at 5,333.97.

In Toronto, the S&P/TSX composite gained 92.87 points at 14,826.09, pushed higher as consumer discretionary and industrials stocks advanced.

Bowie said the industrials sector is still enjoying the optimism from Trump’s victory. One of Trump’s biggest promises has been that he will put money towards new, massive infrastructure projects.

In currencies, the Canadian dollar dipped 0.36 of a U.S. cent at 74.04 cents US, as oil tracked lower and the U.S. dollar strengthened.

In commodities, the December crude oil contract declined 15 cents at US$45.42 per barrel, while the January contract, which traded at a higher volume, fell 12 cents at $45.98 per barrel.

The December gold contract lost $7 at US$1,216.90 per ounce and the December copper contract gained two cents at US$2.49 per pound. The December contract for natural gas fell six cents at US$2.70 per mmBTU.