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  3. US markets closed mostly higher; Fed raises rates

US markets closed mostly higher; Fed raises rates

14 Dec 2017 Evaluate

The US markets closed mostly higher on Wednesday, with the Dow ending at a record for a fourth straight session after the Federal Reserve raised interest rates, as had been widely expected. While the day’s gains were broad, a sharp decline in financial shares limited the broader market’s advance and pushed the S&P 500 into slightly negative territory in the final minutes of trading. Investors also digested the results of Alabama’s Senate election, where Democrat Doug Jones won in an upset victory, defeating controversial Republican Roy Moore. The victory will shrink the Republican Senate majority, leaving the balance at 51-49. That has raised concerns that it will be harder for the Republicans to push through major overhauls, such as tax reform, and that the governing party will struggle in the 2018 midterm elections. On the economy front, the consumer price index climbed 0.4% in November. Three-quarters of the gain reflected higher gas prices. If gas and food are stripped out, the so-called core rate of inflation rose a weaker than expected 0.1%. The yearly rate of inflation as measured by the CPI rose to 2.2% from 2%. The more closely followed core rate fell a tick to 1.7%, however.

Meanwhile, the Federal Reserve lifted a key US interest rate, but the central bank also struck a wait-and-see stance in light of persistently low inflation and a pending change in leadership. The central bank as widely expected raised its benchmark federal funds rate by a quarter percentage point to between 1.25% and 1.5% - the fourth increase in a year. Yet the central bank made no change to its forecast for inflation and interest rates in 2018, hewing to earlier plans for three rate hikes in 2018. The aim is to raise the cost of borrowing for consumers and businesses to ensure the economy doesn’t overheat and spark a bout of inflation, but to do so in a gradual way that minimizes any hiccups. The Fed itself raised its estimate of US gross domestic product next year to 2.5% from 2.1%, reflecting the view that pending tax cuts by a Republican Congress will give the economy another shot in the arm.

Additionally, Federal Reserve Chairwoman Janet Yellen noted that stock prices are high by historical levels, but she didn’t see anything flashing red. In her final news conference as Fed chairwoman, she said the US central bank expects the job market to remain strong, though the pace of job growth should decelerate as the Fed continues to tighten policy. High inflation is less of a worry. Although a majority of officials think inflation will move up in 2018, they still see it ending the year just under 2%. That’s a remarkably low level with unemployment likely to dip below 4% next year. The Fed predicts unemployment will average about 3.9% in the next two years, compared to the current rate of 4.1%.

The Dow Jones Industrial Average added 80.63 points or 0.33 percent to 24,585.43, the Nasdaq gained 13.482 points or 0.20 percent to 6,875.80, while the S&P 500 edged lower by 1.26 points or 0.05 percent to 2,662.85.

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