Analysts' take on the US Fed Reserve rate hike

A man walking past the Federal Reserve Bank in Washington, D.C., US.
A man walking past the Federal Reserve Bank in Washington, D.C., US. PHOTO: REUTERS

US Fed Reserve raised key interest rate for only the third time in a decade by 25 basis points, leading to a jump in Wall Street indexes, a falling US dollar and a boost to Asian markets. Here's a quick look at analysts' reactions to the hike:

Richard Jerram, chief economist at Bank of Singapore

In the end there was no reason for the market to "beware the Ides of March" as the Fed pushed interest rates higher but did nothing to shock.

As unemployment continues to fall and inflation starts to overshoot, the pressure will be on the Fed to deliver a faster pace of tightening than currently planned. We continue to expect seven rate hikes by the end of 2018 (three this year, four in 2018) and there is a decent chance that the Fed ends up moving each quarter until rates are back to normal at 3 per cent. By hiking in March, the Fed has left the door open to a faster pace of tightening this year if the data remains strong.

The fiscal policy stance of the Trump administration is still unclear, and there is clearly a chance that an increase in the budget deficit to fund tax cuts will lead to the Fed tightening policy faster than currently planned. However, it looks like this is more likely to be an issue for 2018 rather than 2017.

Alvin Liew, Global Economics & Markets Research at UOB

As widely expected, the Fed Reserve raised interest rates by 25 basis points, and the FOMC statement maintained a positive outlook on the US economy and labour market. But, Fed was silent on US fiscal outlook under the new administration and its impact on the US economy. It also refrained from taking any measures to reduce the size of its US$4.5trillion balance sheet.

We maintain our forecast of three Fed rate hikes this year, with the next two coming in June and September. One of the reasons for our hawkish outlook is due to Trump administration's likely expansionary US fiscal policies and we will watch Trump's Budget proposal closely.

Anthony Doyle: Invesment Director at M&G Investments

A concerted effort by Fed speakers to prepare the market for the 25 basis point rate hike worked, with markets fully anticipating the decision. We anticipate at least two more rate hikes, with a good chance of three by the end of the year dependent upon the extent of fiscal stimulus that is announced by the US government.

In addition to the underlying strength of the US economy, the global economic backdrop remains supportive. Both China and Europe are growing nicely, suggesting that global growth is set to accelerate in 2017 after slowing to 3.0 per cent in 2016. We expect global corporate default rates to remain low and therefore a favourable environment for risk assets like investment grade and high yield corporate bonds.

In addition, interest rates are likely to remain on an easy setting in the UK, Europe, and Japan causing a widening in interest rate differentials to the US, suggesting a further strengthening of the US dollar versus the majors. The main downside risks to the global economy appear to be political developments in Europe and the UK, a major change in US trade policy, or a delay in the implementation of US tax reform and fiscal stimulus.

Lee Ferridge, head at State Street Global Markets

This was widely expected. Improving real economic data, continued strong labour market gains and a rise in headline inflation set the stage for the FOMC to deliver the first of three projected 2017 tightenings. Attention will now most likely shift to the June 14 meeting when many expect a further increase in rates. However, with the much talked about Trump adminstration's fiscal stimulus still is some way away from fruition, the Federal Reserve (Fed) will wish to see continued economic strength and, perhaps, signs of a pick-up in wages before committing to a June move. It will take further positive economic news to continue the push in US bond yields and US dollar higher.