US markets closed higher after Fed signals rate hike

19 Nov 2015 Evaluate

The US markets closed higher on Wednesday, after the minutes from the Federal Reserve’s October policy meeting confirmed that a majority of policy makers were open to an interest-rate hike in December. Federal Reserve policy makers made a conscious decision in October to prepare markets for a potential December rate hike, provided that the economic data justifies the increase in borrowing costs. The minutes from the October meeting, released showed that most members of the policy-setting Federal Open Markets Committee (FOMC) were comfortable not raising rates in October but seemed ready for a December liftoff. So much so that they included a new line in their October statement that would telegraph their intentions. But despite the faith in the near-term outlook, the Fed also debated what could become a core concern as it enters its first policy tightening cycle in a decade - the underlying potential of the US economy. The debate took the form of a discussion of the equilibrium real interest rate - the policy rate, net of inflation that would be consistent with full employment and the Fed’s 2% inflation goal. The October minutes also showed that FOMC members want markets to focus more on the trajectory of future rate hikes rather than the timing of the first increase.

Moreover, even before the minutes, Fed officials were telegraphing their intentions. Several regional Fed presidents made hawkish comments on Wednesday morning, reassuring investors that they believe the US economy is on solid footing and that they intend to raise interest rates soon. Three of them - New York Fed President William Dudley, Cleveland Fed President Loretta Mester and Atlanta Fed President Dennis Lockhart - appeared at a panel at the Clearing House annual conference in New York and openly backed an interest-rate hike soon.

On the economy front, home builders scaled back construction in October, especially in the South where storms and flooding disrupted work. So-called housing starts fell 11% last month to an annual rate of 1.06 million. That’s the lowest level since March. Housing starts in September were also revised down slightly to a seasonally adjusted 1.19 million rate. Yet a rebound in permits to build new homes suggests the slowdown in October is likely to be temporary. Permits rose 4.1% last month to a 1.15 million annual rate.

The Dow Jones Industrial Average added 247.66 points or 1.42 percent to 17,737.16, Nasdaq was up 89.18 points or 1.79 percent 5,075.20, while the S&P 500 gained 33.14 points or 1.62 percent to 2,083.58.

Indian ADRs ended mostly in red, HDFC Bank was down 0.57%, ICICI Bank was down 0.13% and Tata Motors was down 0.05%. On the other hand, Dr. Reddy’s Lab was up by 0.13%.

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