US Federal Reserve Rate Hike causes Stock Markets to step back

Stock markets were found in the red this week after the US Federal Reserve announced a hike in interest rates for the first time in 2016. However, markets were unprepared despite the decision being anticipated weeks in advance.

Toronto’s S&P/TSX composite index experienced a drop of 1.22% or 188.09 points at 15,197.18. It was a negative end to the day for all sectors. Gold experienced the maximum decline with a 4.55% drop. It was closely followed by materials and energy with drops of 2.77% and 2.28%, respectively.

At Wall Street, the industrial average for the Dow Jones fell by 118.68 points, bringing the final figure to 19,792.53. Similarly, the S&P dropped by 18.44 points, with the final figure settling at 2.253.28. The NASDAQ also slipped by 27.16 points to 5,436.67.

The Canadian Dollar went down by 0.58 US Cents to settle at 75.56 US Cents.

The January crude contract dipped to US$51.16 per barrel, while natural gas gained six cents, reaching US$3.54 per mmBTU. The February gold contract dipped to US$1,154 per ounce, while the March copper contract also slipped by a penny to reach US$2.59 per pound.

Growing Economy, Higher Inflation

According to the Federal Reserve, the possibility of higher inflation and symptoms of a growing economy fuelled the need for an interest rate hike of 0.5 to 0.75 %. In fact, the Federal Reserve has informed that there could be almost 3 rate increases in the coming year.

This is the first time interest rates have gone this high since December, last year, when the rates had been increased from near 0 after the financial crisis of 2008.

Experts Suggest Hike was Necessary

According to Sadiq Adatia, Chief Investment Officer at SunLife Global Investments, the rate hike was necessary as economic data clearly supported it. He added that the Federal Reserve realized an increase in inflation, which needed to be addressed right away and that the current status of the economy allows for rate hikes.

Adatia also believes that the Central Bank anticipates Trump’s presidency to bring in some stimulus. However, there is still some uncertainty over what he will actually do, which is why the Federal Reserve hasn’t mentioned his name.

Adatia claims that the Federal Reserve definitely had Trump on their mind, but, remained silent because he hasn’t yet taken office, nor have his policies been implemented.

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