We can finally put the US interest-rate debate to bed or at least for the moment as the US Federal Reserve lifted its benchmark short-term lending rate for the first time in a year. While it appears that further US rate hikes are likely ahead, there is a growing belief that the low interest-rate environment is likely to persist for the immediate future. Economic commenters are urging caution against market exuberance that has been present following the US presidential election.
Overall, the Fed’s move was a healthy course, given the very low level the federal funds rate has been at for such a very long time. The increase has been anticipated and fully priced in the market. It is important to look at the Fed’s guidance in terms of where rates are headed. The federal funds rate remains extremely low and many anticipate that short and long-term interest rates are likely to remain low to a long time. As we look into 2017, we are likely to see the federal funds rate averaging somewhere around 1%, which is still extremely low. Some experts anticipate there to be more interest-rate increases ahead, but they all expect them to be very gradual. It was December 2015 when the Fed raised rates for the first time in this cycle, so we’ve seen a full 12 months between increases. We expect the time frame for the next rate hike to likely contract going forward, but we see the pace of increases being extremely gradual, something on the order of 0.75% per year for the next couple of years. While interest rates are rising, nominal rates and pace of future increases need to be kept in mind.
The impact for Australia will be minimal but will be felt. Already we have seen a number of lenders increase their lending rates for business and investment. These changes are only a few basis point to ten basis points. Most Australian lenders rely heavily on funding from the US and Europe and simply this cost was been passed on and without fuss have done this. It would seem with increasing borrowing costs that the RBA is less likely to move on rates. I think it is increasingly obvious that rates wont be getting any lower and we need to prepare for an eventual increase at some point during 2017.
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