Fed rate-hike plans send stocks down

Times Colonist - - Business -

Ma­jor North Amer­i­can in­dices fell af­ter the U.S. Fed­eral Re­serve said it will raise in­ter­est rates this year more times than ini­tially ex­pected.

The Toronto Stock Ex­change’s S&P/TSX com­pos­ite in­dex fell 23.16 points to 16,265.82. In New York, the Dow Jones in­dus­trial av­er­age shed 119.53 points to 25,201.20. The S&P 500 in­dex re­treated by 11.22 points to 2,775.63 and the Nas­daq com­pos­ite in­dex lost 8.09 points to 7,695.70.

The fall came af­ter the Fed­eral Re­serve is­sued a state­ment say­ing it was rais­ing its bench­mark in­ter­est rate 25 ba­sis points to two per cent — the sec­ond rate hike this year. The Fed also an­nounced it would raise rates an­other two times this year, bring­ing the 2018 to­tal to four when many in­vestors ex­pected three.

“There’s go­ing to be a lot more pres­sure on the Cana­di­ans right now if we’re see­ing four rate hikes from the States to do at least one ... if not two this year,” said Michael Cur­rie, vice-pres­i­dent and ad­vi­sor at TD Wealth.

The Bank of Canada is ex­pected to raise rates in July, said Cur­rie, but now the like­li­hood that it will do so again be­fore the end of 2018 has gone up. The Bank of Canada will have three more in­ter­est rate an­nounce­ments af­ter July 11.

For­eign in­vestors look for the best rates in sta­ble coun­tries for their money, he said, and of­ten choose be­tween Canada and the U.S. Peo­ple mov­ing their money out of Canada into the States, he said, pushes down the loonie.

“The best way to de­fend the dol­lar is to keep rais­ing rates.”

The Cana­dian dol­lar av­er­aged 76.99 cents US, up 0.09 of a US cent.

The ac­tion means con­sumers and busi­nesses will face higher loan rates over time. It was the Fed’s sev­enth rate in­crease since it be­gan tight­en­ing credit in 2015, and it fol­lowed an in­crease in March this year.

When the Fed last met in May, it left its short-term rate un­changed. But it noted that in­fla­tion was edg­ing near its two per cent tar­get af­ter years of re­main­ing un­de­sir­ably low. Should in­fla­tion even­tu­ally pick up, the Fed might move to tighten credit more ag­gres­sively.

A grad­ual rise in in­fla­tion is co­in­cid­ing with new­found eco­nomic strength. Af­ter years in which the econ­omy ex­panded at roughly a tepid two per cent an­nu­ally, growth could top three per cent this year. Con­sumer and busi­ness spend­ing is pow­er­ing the econ­omy, in part a re­sult of the tax cut U.S. Pres­i­dent Don­ald Trump pushed through Congress late last year.

With em­ploy­ers hir­ing at a solid pace month af­ter month, un­em­ploy­ment has reached 3.8 per cent. Not since 1969 has the job­less rate been lower.

Be­gin­ning in 2008 in the midst of the fi­nan­cial cri­sis, the Fed kept its key rate un­changed at a record low near zero for seven years. It then raised rates once in 2015, once in 2016, three times in 2017 and now twice this year.

The Fed aims to achieve its man­dates of max­i­miz­ing em­ploy­ment and sta­bi­liz­ing prices by low­er­ing rates to spur growth dur­ing times of eco­nomic weak­ness and rais­ing rates to slow growth if the econ­omy threat­ens to over­heat. When the Fed tight­ens credit, it aims to do so with­out de­rail­ing the econ­omy. But if it mis­cal­cu­lates and over­does the credit tight­en­ing, it can trig­ger a re­ces­sion.

The Fed’s meet­ing is be­ing fol­lowed by pol­icy meet­ings of two other ma­jor cen­tral banks — the Euro­pean Cen­tral Bank to­day and the Bank of Ja­pan on Fri­day.

Mean­while, the July crude con­tract gained 28 cents to US$66.64 per bar­rel and the July nat­u­ral gas con­tract ad­vanced about two cents to US$2.96 per mmBTU.

The Au­gust gold con­tract rose US$1.90 to US$1,301.30 an ounce and the July cop­per con­tract moved up about a penny to US$3.25 a pound.

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