FOMC Raises Rates by 25 Basis Points

The US Federal Reserve raised interest rates by 0.25% to a range of 2-2.25% early this morning as widely expected. Changes to the statement were relatively minor compared to the August statement with the most significant change being that the reference to ‘accommodative’ policy was dropped, implying that the Fed now thinks current interest rates are neutral in terms of the effect on the economy. The so called ‘dot plot’ which shows where voting members expect rates to be in the future are still indicating one more hike for this year and another three in 2019. This year’s final hike is expected to occur in December and according to the CME Fedwatch tool there is an 80% chance of such a hike. This brings us to the rare situation where US interest rates are above Australian rates with a gap that is expected to continue widening. If the US December rate hike occurs it will bring the spread to 1%.  

The Dow Jones had been tracking slightly up throughout the US trading session until the rate decision caused a fairly rapid decline to put the index at an 0.4% loss for the session. It was a similar story for the S&P 500 which closed down 0.33%. US long term bond yields reacted to the news by dropping with the 10-year yield falling 5 basis points to 3.05%. This comes after briefly reaching the seven year high of 3.11% which is beginning to prove itself as a strong resistance level.   

The Reserve Bank of New Zealand also met to decide interest rates this morning but kept rates on hold at 1.75%. ASX 200 futures are down 17 points this morning, presumably as a result of the weak US leads following the rate hike. 

Data Releases:

-    US Durable Goods Orders 10:30pm AEST

-    US Final GDP 10:30pm AEST

This article was written by William O'Loughlin - Investment Analyst, Rivkin Securities Pty Ltd. Enquiries can be made via william.oloughlin@rivkin.com.au or by phoning +612 8302 3633.

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