Fed raises interest rate; global markets rally

The United States Central Bank known as Federal Reserve approved a quarter point increase in its target fund rate. The new target fund rate would range from 0.25 to 0.50 per cent. It was the first time that the (Federal open Market Committe) FOMC increased the interest rates in seven years ending what was considered as the most accomodative monetary policy in United States History.

A strong growth in US economy led by a healthy job data, increase in household spending, increase in fixed investment by businesses have concomitantly provided for a strong growth rate. The improvement in the housing sector has been the main catalyst. A range of recent labor market indicators, including ongoing job gains and declining unemployment, shows further improvement in the US economy and therefore justifying a rate hike decision. The Fed expects that, gradual adjustments in the monetary policy will not deter the economic activity and it will continue to expand at a moderate pace and labor market indicators will continue to strengthen further.

The Fed stated, that the monetary policy stance remains accommodative after this increase thereby supporting further improvement in labour market conditions and a return to 2 per cent target rate of inflation in the medium term. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate. However, the actual path of the federal funds rate will depend on the economic outlook and incoming data.

The statement from FOMC was perceived to be dovish by the markets. The US stocks rallied after the Fed announced that it is raising its key policy rate for the first time in nearly a decade showing a sign of confidence in the US. Economy. The Federal Reserve made it clear that the future rate hikes would be gradual and data dependent and this was judged positive by the investor community. The Dow Jones industrial average,S&P 500, Nasdaq Composite all increased by 1.28, 1.45 and 1.52 per cent respectively.

The interest rate hike was cheered by the other Global markets too as it ended the period of uncertainty surrounding the increase in the rates which had been playing over the minds of investors world over.

The Asia-Pacific markets welcomed the rate hike decision and a dovish Fed commentary which was indicative of the fact that all the major indices in the region were trading in green. Japan’s Nikkei rose 2.4 per cent, Australia’s S&P/ASX added 1.8 per cent, Shanghai Composite added 1.2 per cent and Indonesia’s Jakarta Composite gained 1.3 per cent.

The Indian markets too gave interest rate increase a thumbs up as it opened high in the early part of trade. A 0.25 per cent rate hike was already factored in by the markets. The rate hike will not be very negative for the Indian markets though there could be a slight increase in foreign outflows as FPI's re-balance their portfolios.

A rise in interest rate signals the inherent strength in the US economy which augers well for the global markets as it continues to remain a key consumer for their products and services. Indian companies which are present in sectors like IT & Pharma are slated to benefit from a strong US economy. IT companies mainly Infosy's, TCS, HCL Technology etc., will gain from a stable & healthy US economy as they generates most of their revenues from it. Pharmaceutical majors like Sun Pharma, Lupin , Dr Reddy's etc, will be positively affected given their big presence in United States.

Further increases in rates would affect the emerging market flows depending on how soon and aggressive US Fed will be.