Fed Raises Interest Rates: The Market Reacts With a Jump: Australian Market to Follow

Submitted by Marco on 30 June, 2006 - 09:19

So the market has got what it has been waiting for. And how did it react? Very positively. The US Federal Reserve Bank raised their key interest rates for the 17th consecutive time but also cautioned that any further rate hikes would depend on economic developments. The rate was increased by a quarter point to 5.25 percent, the highest in five years. Two years ago, the interest rate stood at 1 percent - a 46 year low. An this is how the US markets reacted: The Dow was jump started by 2 percent of 217.24 points to 11,190.80. An interesting observation was that the Dow was up about 80 points before the Fed's announcement.

"There is a sense that another rate hike by the Fed won't be automatic. This is a relief rally," said David Jones, chief economist at DMJ Advisors, a Denver-based consulting firm.

The US Federal Reserve - "The Fed" raised their interest rates by a quarter point to 5.25 percent; market reacted positively

The market has been expecting such a rise, and some even speculated an increase of half a percent - perhaps that is why we had the jump. However in the accompanying statement The Fed noted economic growth has moderated but that "some inflation risks remain." It also said it would look at the economy's growth rate as well as the impact of inflation in deciding whether to raise rates in the future.

But Jack Ablin, chief investment officer at Harris Private Bank, said the statement was inconsistent with the tough talk on inflation used by a number of Fed officials in recent speeches. Although investors may be relieved that the Fed has "taken the teeth out of the statement," the risk of stagflation — rising inflation in a stalled economy — is still out there, he said.

"This is an initial reaction," Ablin said. "The true test will be seen over the coming months as we see some of this trying data."

The stock markets weren't the only markets to benefit. A barrel of light crude leaped $1.33 to $73.52 on the New York Mercantile Exchange. Gold prices gained to about $590 per ounce.

The interest rate hike was widely expected as a result of comments Bernanke made on June 5 in which he called a rise in the rate of inflation an "unwelcome" development, a comment that contributed to a one-day 199-point drop in the Dow Jones industrial average.

Bernanke, a former Princeton economics professor and chief economist for the Bush White House, took over for venerable Fed Chairman Alan Greenspan on Feb. 1. Bernanke's first five months on the job have seen some rocky times as he has alternately sent markets soaring or plunging based on his comments.

Some economists have complained that Bernanke, in an effort to be more open about the Fed's thinking, is actually increasing confusion.

The next date to mark on your calendar is August 8. Some analysts have speculated that the Fed could still raise rates for the 18th consecutive time if the US economy has not showed signs of slowing - i.e. a much lower inflation rate.

Expect the Australian Market to follow suit this morning when it opens at 10am.

In other Interest rate news, Taiwan's central bank (Central Bank of China) raised its benchmark interest rate for an eighth straight time to the highest in almost five years, and suggested more increases may come. The bank increased their discount rate on 10-day loans to banks by an eighth of a percentage point to 2.5 percent, it said today in Taipei after its quarterly rate meeting.

ABC News

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