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UK public finances beat forecasts, as Ryanair boss apologises over cancellations –as it happened – The Guardian

Risky asset markets took the Fed’s unexpectedly-hawkish tone on Wednesday in their stride. We think that they will remain resilient over the next year and a half or so, even though we forecast that the Fed will hike rates once a quarter between now and the early 2019.

The US dollar and Treasury yields rose after the conclusion of the FOMC’s meeting on Wednesday in response to the committee’s signal that it is likely to raise the federal funds rate in December, despite the weakness of core inflation and the effects of the recent hurricanes. (The Fed also announced the start of balance sheet “normalisation”, but this was widely expected.)

In the event, there was little reaction in risky asset markets. The S&P 500 was almost unchanged on the day, and movements in emerging market equities were small. This might be partly due to the fact that the Fed’s tone was not a huge surprise. But a couple of other factors have probably helped risky assets to be resilient too – not just on Wednesday but throughout the Fed’s tightening cycle so far. We think that these factors will continue to provide support this year and next, even if the Fed hikes rates as we expect.

First, there has been little to suggest that higher rates are dragging on economic growth, and we expect this to remain the case in 2017 and 2018. The US economy has expanded at a healthy pace since the Fed started hiking and we forecast it will continue to do so this year and next…

Second, the likelihood that interest rates will ultimately remain quite low, even if they rise in the coming quarters, has probably supported the valuations of risky assets. Despite their hawkish near-term signal on Wednesday, FOMC participants’ median forecast for the level of the federal funds rate in the “longer term” fell by 25bp, to 2.75%, the lowest since these projections were first published in 2012…

Taking this all into account, we think that risky asset prices will continue to hold up well as the Fed applies the brakes in the next eighteen months or so. However, we suspect that the lagged effects of higher rates will eventually begin to take their toll on the US economy as the Fed reaches the end of its tightening cycle in 2019. If the US economy did falter, risky asset prices globally would probably fall quite sharply.

UK public finances beat forecasts, as Ryanair boss apologises over cancellations –as it happened – The Guardian

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