After 10 years of low interests the anticipated raise is here

Lorenzo Ippoliti, Milán

The Federal Open Market Committee delivered yesterday its widely anticipated decision to raise rates by 25 basis points, the first rate hike in almost a decade.

After previous communication failures by the FEd, the main objective this time was to meet expectations and make the hike as benign as possible for markets. If this was the objective we can say that it was achieved quite successfully. Consensus expectations were for a hike and a dovish statement and that is what we got. The tone of Janet Yellen, although quite upbeat on labour markets, consumption and investment spending, still sounded dovish in many other aspects. She stated that one of the main reasons for the FED to hike was to increase its flexibility to respond to possible negative shocks. This sounded quite dovish to me.

Rally in the Asian markets

Markets responded the way the FED had  hoped for with Asian stock markets rallying.

If there is one lesson that the FED has learnt after September is that the markets want an accommodative message but not a message that sounds worrying about the state of the economy. This time Janet Yellen was very effective in continuously underlining the strength of US economy and downplaying a bit external and internal risk factor. As far as emerging markets are concerned, she pointed out there was weaknesses. However, she indicated a strong US economy as a source of strength for emerging markets. She also tried to reassure on the state of high yield credit markets talking about the Third Avenue as an isolated case of a fund with concentrated positions in illiquid bonds and not a systemic issue.

Insofar as the path of future interest rate movements is concerned, there were no meaningful changes in the dot plot ( chart that represents the view of individual Fomc participants on the appropriate fed funds rate at the end of the next few years). A large move down of the plot would have been inconsistent with the rate hike. Median forecasts for fed funds at the end of 2016 is still 1.4%, as always higher than market expectations and still implying 4 rate hikes next year.

What does all this mean for markets?

The FED action certainly removes, at least in the short end, a source of uncertainty (that probably would have been better to remove a few months ago). The stock markets responded well and we are probably going to see volatility subsiding into the end of the year with a Santa Claus rally now becoming the consensus view. As far as the dollar is concerned, it bounced around for a while after the announcement and then headed higher in the Asian session probably more on the back of a risk-on environment rather than on expectations of further monetary policy restrictions. We are now approaching the very significant support at 1.08 in EURUSD that we are going to break only if markets maintain a positive tone.

Lorenzo Ippoliti

Lorenzo Ippoliti is a proprietary trader with 20 years of experience mainly in Forex and credit markets. He has worked for some of the major banks in Italy. Lorenzo holds an MBA for the SDA Bocconi School of Management.

The economy theory established that the monetary policy and specially the hikes in interest rates have a negative impact in the equity markets. But there are statisitcs where the interest rates are not so determinating.

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