By Joyce Yu
Philadelphia, PA–Global equities saw little movements as investors absorbed the Federal Reserve’s plans to pursue both higher interest rates and balance-sheet reduction in the coming months.
“We suspect the Fed will be confident enough to hike rates again in December,” said James Smith, an economist at ING.
He told the Financial Times that “The Fed’s economic assessment remains fairly upbeat with the latest 2017 growth forecast revised up to 2.4 per cent. We’re expecting growth in the 2.5-3 per cent region again in the third quarter.”
The Dow Jones industrial average and S&P 500 reached all-time highs yesterday and European stock markets drifted higher in early sessions. Overnight Asian markets, on the other hand, ended lower.
The greenback strengthened following Fed’s announcement, holding around its highest level of the month.
The U.S. central bank said it will start shrinking its balance sheet beginning in October, and maintained a forecast for one more rate increase this year.
While it is in line with market expectation that this week’s meeting will leave the benchmark interest rate unchanged, Fed’s hawkish forecast for another rate hike at the end of the year came as a surprise.
“Yesterday was a momentous day, the beginning of the end of QE,” Bhanu Baweja a cross-asset strategist at UBS, said in an interview with Bloomberg TV.
To some other analysts, Fed’s decision was within their expectation.
“The hint of a rate hike in December was no surprise to us and we reiterate our stand, that it is not likely to unravel the market’s bullish posture in anticipation of tax cuts,” shared Peter Cardillo, chief market economist at First Standard Financial, with the Reuters.
Separately, S&P Global Ratings downgraded China’s long-term sovereign credit rating to A+ from AA- on Thursday for the country’s increasing risks from its rapid build-up of debt.
“The downgrade reflects our assessment that a prolonged period of strong credit growth has increased China’s economic and financial risks,” S&P said in a statement, adding that the ratings outlook was stable.
“The downgrade is a timely reminder for the authorities that China needs to bite the bullet on some of the more painful reforms that have been left to last, namely corporate deleveraging and restructuring of state-owned companies,” said Rob Subbaraman, an economist at Nomura in Singapore, to the Reuters.
“The focus needs to shift from quantity to quality of growth. I hope that later this year China lowers its GDP growth target to 6 percent to 6.5 percent, or not have one at all. That would be a positive sign.”