Fed doubles interest rates 17 December 2015Washington DC Reporter: Drew Nicol
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The Federal Reserve’s board has voted unanimously to raise interest rates from 0.25 to 0.5 percent for the first time since 2006.
As part of its policy decision, the Federal Reserve Bank of New York was authorised to execute overnight reverse repurchase operations at an offering rate of 0.25 percent.
The amounts available for these transactions will reflect the value of treasury securities held outright in the System Open Market Account by a per-counterparty limit of $30 billion per day.
Several industry observers noted the significance of the much anticipated rake hike but also reiterated that this was just the beginning of the next phase of the market's recovery from the latest crisis.
“We expect two further rate hikes, but Fed watching will become much more thrilling than in previous years,” commented Stefan Kreuzkamp, chief investment officer at Deutsche Asset & Wealth Management.
“The Fed now controls two levers for its monetary policy: the federal funds rate and the speed by which it changes its policy of reinvesting proceeds from maturing bonds.”
Kreuzkamp added that the real test for the Federal Reserve will come in 2016 and that, due to the sluggish speed of economic growth, it’s not obvious when the next rate hike will come.
“Investors may well have to learn to live with greater uncertainty about the path of monetary policy. Having squeezed volatility in recent years, at least the US monetary policy is likely to have the opposite effect in the months to come.”
“The Fed is clearly entering unchartered territory as it has never embarked on a hiking path in an environment with such low growth rates and never with such a bloated balance sheet.”
“The fact that reserve balances of financial institutions at the central bank have grown from $15 billion in 2007 to now $2.5 trillion makes the Fed’s task more difficult. We expect no shrinkage of the Fed’s balance sheet until after the first few rate hikes."
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