This is a quick note on the FED's rate hike by our Global Desk.
Author : iFAST Research Team
For the US,the Fed has raised the Federal fund rate by 25 basis points to 1%-1.25%. Within the FOMC statement, the Fed remains optimistic about the US economy, with a 0.1 percentage point upgrade on their forecast for 2017 US GDP growth to 2.2%. The Fed however, admits that inflation will stay below their target of 2% within 12 months period, but insist that the figure will rise back to 2% in 2018 and 2019. The statement also includes confirmation that the Fed is planning to start shrinking their balance sheet by means of reducing their reinvestment amount. The current plan is to have 6 billion Treasury bonds and 4 billion mortgage backed securities to run-off each month when they mature, with the amount increasing each quarter until the cut reaches 30 billion and 20 billion.
Overall, the Fed seems comfortable sticking to their rate hike schedule given the current growth trend, despite a lower-than-expected inflation prospect. Another rate hike of 25 bps is to be expected in 2017, yet the precise timing is now uncertain. An educated guess is that the rate hike will likely happen in December instead of September, as the Fed needs more time to assess their estimation upon inflation and the global market, given that PCE and hourly wage both have seen adverse movement lately, while Germany will have their election in September and the market expects Trump administration to shed some light on the feasibility of its expansionary fiscal policies within the year.
Although our market has reacted to this rate hike, we believe that Investors need not panic as the FED's action was on expected lines. We advise our Investors to use every correction as an opportunity to take exposure into the markets.
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