The highlight of weekly and arguably yearly news is the recent decision to raise interest rates in the United States by 25 basis points. The FOMC meeting that resulted in this liftoff begins a period of monetary normalization that is forecast to last through the next few years, consisting of four separate hikes next year adding up to a projected 1.40% by the end of 2016. Nearly seven years after the Federal Reserve enacted a rate of 0.25% in order to combat the financial crisis, the new 0.50% rate comes on the back of favorable economic data released in recent months, though the economy is still not without downside risks. The main threat to forward momentum is inflation, a problem that currently faces most major economies, though the strong US dollar and weak energy prices in the US mean that eventual achievement of a 2.00% inflation target may take longer than it will for peers. The latest divinations seeing the target as acquired in 2018.
Federal Reserve Chairwoman Janet Yellen in her press statement on the path of rates in the long term, eased market concerns with the idea that the new policies are born out of confidence, and that rates will not change drastically as the Fed has no plans to sell assets acquired during stimulus measures. Market movement followed the assurances given by Chairwoman Yellen in a surprising reversal from traditional reactions, with the dollar barely moving and equities rising higher on the news. The dollar moved slightly upwards, and with the idea that more hikes are to follow in 2016 plus the concurrently poor results in peer economies it may be just the beginning of a long incline. Though policymakers have not yet stated that the enormous amount of assets added to the balance sheet will be sold, the sheer size of the $4,450,000,000,000 sheet indicates it is likely to happen when they deem the markets ready for the announcement. This potential balancing act combined with the stronger dollar may prove to weigh substantially on equities heading into 2016, even though their initial reaction was to bloom.