The Fed has finally moved its benchmark interest rate after weeks of speculation about what will happen and when. The rate has now been moved up by 25 basis points, giving analysts much reason for cheer as they have been predicting a rate hike for a while now and that too in March.
The reason for the hike
According to the Fed, the rate hike comes, as expected, after heartening news on both the wages and jobs front last week. Headline inflation has also been inching up and Fed sources have stated that, with it getting closer to the 2% target, the rate hike is justified. There is an indication that two more hikes may come in before the year draws to a close.
Stocks finish higher
As soon as the news of the rate hike trickled in, the impact on the U.S. stock market was quite evident. Stocks moved up and the Dow Jones Industrial went up by 0.5% by end of day. The S&P 500 also ended higher by some 0.8% and the NASDAQ composite was up by 0.7% at the closing time.
Economic growth still subdued, warns economist
However, some analysts are of the view that the stock market may be the only thing that is strengthening. Some analysts have made their opinions felt that this should not be the only factor considered by investors to understand the true state of the market as economic growth, overall, continues to be subdued. They have also cautioned that when rate hikes have been imposed in such conditions, there has generally been a recession in the coming months.
Supporting this more cautious stance is the fact that the average annual GDP stands still at 1.3% and has been at the same level since 2008. It must be noted that this has been the lowest that this level has touched, historically. Add to this the fact that the inflated asset prices are pretty much the only indicator in a strengthening economy and it is easy to see why some analysts are holding on to a Cassandra type view of the whole situation. The Fed has already been trying, unsuccessfully until now, to deal with dismal productivity and this is not an area that will improve with an interest rate hike. Until some real headway is made in this area, it may be difficult to lock in the benefits of the rate hike within the economy.