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Federal Reserve Hikes Rates

Published 20/12/2018, 09:45 am
Updated 09/07/2023, 08:32 pm

Originally published by Rivkin Securities

The main event of the night was the US Federal Reserve meeting to decide interest rates. The market widely expected a 25-basis point hike and the Fed didn’t disappoint. The devil was in the details, however, as markets had clearly hoped for a significant dialling back of rate hike expectations for 2019 which the Fed didn’t deliver. The average forecast of the Fed voting members is for two hikes next year, down from three, which the market considers to be too many. Prior to the announcement, the Dow Jones was up around 300 points but plunged following Jerome Powell’s press conference. At the end of the session, the Dow Jones Industrial Average closed down 1.5% while the S&P 500 was down a similar amount. The economic data out of the US has been reasonably strong with the unemployment rate below 4.0% and GDP growth chugging along at around 2.5%. This, together with low inflation, is why the Federal Reserve is comfortable to continue raising rates.

The US dollar index rallied following the FOMC statement which put pressure on assets priced in US dollars, such as gold. After reaching as high as US$1,258 before the statement, gold sold off rapidly to close at US$1,243. Oil, on the other hand, benefited from an unexpected drawdown in inventories together with a statement from Saudi Arabia that it expects the output cut agreement to be extended beyond the initial term. Although WTI oil climbed 2% on this news, it is still near 15-month lows.

Later today, Australia’s employment data will be released. Expectations are for the unemployment rate to remain steady at 5.0% and 20,000 new jobs to have been created. ASX 200 futures are down 32 points this morning. Both the Japanese and UK central banks will meet to decide interest rates today and both are expected to keep rates on hold.

Data Releases:

- Australia Employment Data 10:30am AEDT

- Japan Monetary Policy Statement (time tentative)

- UK Monetary Policy Statement 10:00pm AEDT

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