1. US rate liftoff smooth but path seen rocky

US rate liftoff smooth but path seen rocky

The Federal Reserve's first interest rate increase in nearly a decade went off without a hitch this week, but it was far from clear whether subsequent rate hikes could repeat this level of smooth-sailing.

By: | Published: December 21, 2015 8:56 AM

The Federal Reserve’s first interest rate increase in nearly a decade went off without a hitch this week, but it was far from clear whether subsequent rate hikes could repeat this level of smooth-sailing.

The U.S. central bank ended its seven year near-zero rate policy on Wednesday and achieved its higher target rate range of 0.25-0.50 percent without relying heavily on its reverse repurchase agreement program to keep rates from sagging toward zero, analysts said.

“By all means it was a very smooth procedure,” said Bruno Braizinha, interest rate strategist at SG Corporate & Investment Banking in New York.

The U.S. federal funds rate, which banks charge each other to borrow excess reserves, averaged 0.37 percent on Thursday, which was the highest in seven years, according to Fed data released on Friday.

The stock market, however, has turned lower following a brief rally on the rate hike. The continued drop in oil prices rekindled worries on corporate profits on energy companies and disflationary pressure worldwide.

The London interbank offered rate on dollar-denominated loans among banks for three months settled at 0.58550 percent, its highest in 6-1/2 years.

In the $5 trillion repurchase agreement market where banks and Wall Street use securities as collateral to obtain short-term loans, interest rates held steady at 0.43 percent to 0.47 percent, hovering at their highest since late June, according to ICAP data.

It will take several more weeks, perhaps months, for Fed policymakers to assess the effects from Wednesday’s rate hike, which some analysts and fund managers describe as the most telegraphed in Fed history, so they could decide whether they could hike again.

“The bar gets higher for the next hike and even higher for subsequent hikes,” said Jim Caron, portfolio manager at Morgan Stanley Investment Management in New York.

The Fed in its latest forecast suggested it might raise the fed funds targets four times in 2016, double what traders have priced in.

In a Reuters poll released on Friday, 77 of 120 economists forecast another rate increase from the Fed in the first quarter of 2016, mostly likely in March.

Interest rates futures implied traders see the Fed hiking rates by mid-2016, followed by another in late 2016 , according to CME Group’s FedWatch program.

“The market still doesn’t believe what the Fed says on paper,” said Jason Celente, senior portfolio manager at Insight Investment in New York.

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