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US Fed Increases Interest Rate: 10 Key Facts to Know

December 2015

December 17, 2015 | 10:05 | Dubai

The US Federal Reserve tightened monetary policy by 25 bps overnight, increasing the Fed funds target range to 0.25% to 0.50%, with the vote being unanimous. Here are the key things to know about this interest rate hike and its impact on the global financial markets:

(1) The US Federal Reserve increased interest rates by 0.25% to 0.25–0.50%. This was the first hike in nearly a decade, which indicates faith in the economy.

(2) The Fed also raised its projection for the country’s economic growth in 2016 to 2.4% from 2.3%. Economists had expected the central bank to hike interest rate by 0.25%.

(3) As per the Federal Reserve, US industrial production witnessed its sharpest decline in more than three-and-a-half years by 0.6% month-on-month (MoM) in November after a downwardly revised 0.4% MoM drop in October. Economists had expected industrial production to decline 0.2% MoM.

(4) The FOMC said that labour market slack had diminished ‘appreciably’ and said that it is ‘reasonably confident’ inflation will rise to 2% in the medium term. The Fed maintained that future adjustments will be ‘gradual’.

(5) Crude prices declined on Wednesday after the Federal Reserve hiked interest rates amid concerns of a stronger dollar, global supply glut and weak demand outlook. Crude prices dropped 4.9% to USD35.5 per barrel on the NYMEX.

(6) Gold edged up on Wednesday in spite of Federal Reserve’s interest rate hike, expecting that the central bank will be slow in further rate hike in 2016. Gold prices rose 1.4% to $1,078 per ounce on the NYMEX.

(7) Awaiting on the sidelines ahead of FOMC, global sovereign and corporate bonds market did little yesterday.

(8) Though FOMC statement appears slightly more hawkish than market expectations, no material rout or repositioning is anticipated.

(9) Pegged currencies in the world are likely to follow suite with Hong Kong becoming the first cab off the rank raising its key rate to 0.75% on December 17.

(10) Locally in the GCC, Saudi Arabia raised repo rate to 0.5% (+0.25%), Kuwait increased key rates to 2.25% (+0.25%) and Bahrain increased benchmark rate to 0.5% (+0.25%). UAE, Oman and Qatar are likely to announce details soon.

 

Source: Reports by Emirates NBD Global Markets & Treasury and Global Investment House

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