Dollar Bounces Back After Rate Increase

The Federal Reserve open market committee met and raised interest rates again. And the dollar bounces back after the rate increase. More importantly the Fed signals more rate increases to come according to Bloomberg.

The dollar rebounded from an eight-month low after the Federal Reserve raised interest rates for the third time in six months and maintained its outlook for one more hike in 2017.

The Bloomberg dollar index bounced back from a bout of losses earlier Wednesday after Fed officials forged ahead with raising borrowing costs and voiced plans to keep tightening policy even in the face of signs of slowing inflation. Fed Chair Janet Yellen emphasized that some of the factors weighing on inflation will dissipate in coming months and that officials see further hikes as appropriate. The greenback had slumped at the start of the New York session after consumer price and retail sales data missed expectations.

Despite the rate increase the economy is not that strong and inflation risk has fallen off. According to BNN News markets in the USA and Europe fell as growth worries pushed stocks lower.

Stocks fell in Europe and Asia on Thursday as investor concern over the pace of economic growth hit shares in mining and retail sectors while the prospect of tighter monetary policy in the United States and Britain pushed up the dollar and bond yields.

U.S. stock futures signaled a rocky start on Wall Street after the Federal Reserve raised interest rates, as widely expected, and signaled another hike could follow this year.

In emerging markets, Russian shares fell 4 per cent as risks grew of expanded sanctions and the price of oil fell.

European shares, already led down by mining stocks as the stronger dollar pushed metals prices lower, extended losses after data showed British consumers, who have been the drivers of the UK economy are feeling the impact of rising inflation.

All of this has some of us scratching our heads. The Fed typically raises interest rates when the economy is overheating and when inflation is a risk. But the markets are not predicting stellar growth despite the recent run up. The Trump bandwagon is stuck in the mud with serious legal concerns. The promises of lower taxes, less regulation, repatriated corporate offshore cash and massive infrastructure spending are turning into just so much hot air. The Fed has not raised rates enough to slow the economy and they are only signaling one more rate increase this year. Nevertheless they are raising rates and selling their bonds as though the economy was roaring ahead full force.

The US Federal Reserve is set to start unwinding it $4.5 Trillion bond portfolio. Should you sell your bonds before the Fed sells theirs?

The Fed just raised short term rates and cashing in their bonds and giving the money back to the US treasury will serve to jack up long term rates. Although inflation is not an immediate risk and the economy is not steaming ahead all that much the dollar is likely to go up a bit for the time being.