Stocks soar on Fed rate hike
SHARES on Wall Street soared last night after the Federal Reserve raised interest rates in the United States for the first time in nearly a decade.
The dollar also made gains as the central bank’s chairman Janet Yellen said the recovery in America ‘has clearly come a long way’ but warned that ‘it is not yet complete’.
She added: ‘This action marks the end of an extraordinary seven-year period during which the federal funds rate was held near zero to support the recovery of the economy from the worst financial crisis and recession since the Great Depression.’
The Fed raised rates from between zero and 0.25pc – where they have been held since late 2008 – to between 0.25pc and 0.5pc. It was the first rate rise since 2006.
Yellen said future rate rises would be ‘gradual’ and warned that delaying any longer could force the Fed into more ‘abrupt’ action in future and ‘increase the risk of pushing the economy into recession’.
Analysts hailed a watershed moment for the global economy and the Dow Jones Industrial Average rose by 200 points in New York.
Tom Stevenson, investment director at Fidelity International, said: ‘After almost a decade of rock-bottom interest rates, the Federal Reserve has finally put an end to the will-they-won’t-they uncertainty that has hung over markets throughout 2015.’
Nancy Curtin, chief investment officer at Close Brothers Asset Management, said: ‘Far from ringing an alarm bell for investors, this is an endorsement of the strength of the US economy.’
She added: ‘Investors will now be looking to the potential fallout around the emerging markets, particularly those already impacted by the dollar strength. The US is strong enough to withstand the change, but the continued weakness in commodity prices is already a concern, so the decision will certainly be a hangover for those beyond the developed economies.’
The Fed backed out of raising rates in September amid worries about the health of the economy in the US and around the world.
That decision followed weeks of wild gyrations on financial markets, including a dramatic slump on the Shanghai stock market dubbed the ‘Great Fall of China’.
Global markets have been jittery in recent weeks, with commodity prices tanking and shares around the world swinging violently.
Other central banks around the world, including the European Central Bank and the Bank of Japan, are heading in the opposite direction to the Fed, cutting rates or printing money to boost growth.
Experts said another postponement by the Fed could have been more damaging than raising rates. Former US Treasury secretary Larry Summers said: ‘Given the strength of the signals that have been sent it would be credibility-destroying not to carry through.’
But it is feared that even if the US economy is strong enough to withstand higher interest rates the fallout elsewhere could be brutal.
The Chinese economy is slowing – hitting demand for commodities such as oil and copper – while emerging markets such as Russia and South Africa are in crisis.
In a report last week, the Bank for International Settlements warned of the ‘ potential for spillovers’ to emerging markets from higher interest rates amid worries about a debt time bomb.
A soaring dollar and the collapse of emerging market currencies, such as Brazil’s real, have left many companies and countries that borrow in dollars on the brink.
Oxford Economics warned that the Fed may have acted too soon. Jamie Thompson, an economist at the think-tank, said: ‘If a China hard landing were to unfold… the first rate rise in the nascent Fed policy tightening cycle would also, for a while at least, be the last.’