US fed funds rate hit highest in 7 years

23 Dec 2015 | Author: | No comments yet »

Falling One-Week Pound Volatility Masks Sterling’s Risks in 2016.

The U.K. currency’s one-week implied volatility against the dollar headed for its biggest weekly slide since September after the Federal Reserve raised U.S. interest rates for the first time in almost a decade, ending months of speculation about the path of monetary policy in the world’s largest economy. Banco de Mexico’s board, led by Governor Agustin Carstens, boosted the overnight rate 0.25 percentage point to 3.25 percent Thursday from a record-low 3 percent, as forecast by 21 of the 26 economists surveyed by Bloomberg. Agustín Carstens, who also chairs the policy advisory committee of the International Monetary Fund, said Thursday the orderly reaction so far in emerging markets to the U.S. Sterling dropped to an eight-month low versus the greenback Thursday after the Fed’s decision underscored the divergence in monetary policy between the U.S. central bank and the Bank of England. Federal Reserve’s rate increase could be sustained, noting that the coming moves will likely be less transcendental. “A very important thing is that this first step taken by the Fed had taken on a mystical quality, but I think that in subsequent actions taken by the Fed that characterization won’t apply,” said Mr.

Mexican policymakers have been concerned that the long- awaited rate liftoff in the United States, Mexico’s primary trade partner and the world’s largest economy, could lead to capital outflows and financial instability in their country. The central bank has spent about $24 billion in 2015 on intervention programs to support the currency. “The central bank has been watching the Fed very closely and preparing the market for this. The peso, the world’s eighth most-traded currency with a daily volume of $135 billion, strengthened after the widely anticipated Fed decision and closed little changed Thursday at 17.06 per dollar.

Other Latin American currencies, such as the Brazilian real, have also strengthened. “I think that for the time being the solid response can be sustained, but there is constant news that could have an impact on markets,” Mr. Thursday’s rate increase brings to an end an almost seven-year period beginning with Carstens’s predecessor, Guillermo Ortiz, in which Banxico cut rates 11 times as the economy struggled with the global financial crisis and its aftermath. Many economists anticipated that Mexico would follow the Fed after Banxico in July changed its meeting schedule for the rest of 2015 to be able to better react to U.S. moves. The Federal Open Market Committee unanimously voted Wednesday to set the new target range for the federal funds rate at 0.25 percent to 0.5 percent, up from zero to 0.25 percent.

It signaled that the pace of subsequent increases will be “gradual.” The peso plunged 23 percent in the past year and a half through Wednesday, reflecting the decline in oil prices and expectations for higher U.S. borrowing costs. Carstens, who ran unsuccessfully in 2011 to head the IMF and has left the door open to try again next year when Christine Lagarde’s term ends, praised the Fed’s handling of a process of monetary normalization that will gradually end the age of easy money that started after the 2008 financial crash. “The Fed is acting in a way that’s congruent with its mandate and with the communications it has been carrying out for many months. The bank raised rates in a bid to keep the peso competitive, but annual inflation is at 2.2%, the lowest level in 45 years, and economic growth remains moderate.

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