- Category: Economic
- Published Wednesday, December 16, 2015
- CTV News
WASHINGTON (AP) -- The latest on the Federal Reserve's landmark two-day policy meeting which ends Wednesday. The central bank is expected to raise interest rates for the first time in nearly a decade.
U.S. stocks have opened sharply higher Wednesday with investors seemingly relieved that the Fed will finally raise interest rates after months of speculation.
The Dow Jones index was up 0.7 percent at 17,643 while the broader S&P 500 index rose 0.6 percent to 2,055.
The increases came despite the news that U.S. industrial output fell for the third straight month in November, another sign that American manufacturers are under stress. The 0.6 percent monthly decline was markedly more than the 0.1 percent drop anticipated in the markets.
"Anything but a hike tonight would be a very big surprise to the market," said Karl Steiner, an analyst at Nordic bank SEB.
European stock markets pushed ahead as futures markets predicted a solid open on Wall Street ahead of the expected rate hike from the Fed.
Despite a faltering start to Wednesday's session, the Stoxx 50 index of leading European shares was up 0.7 percent. European shares are tracking the anticipated open on Wall Street. Futures markets are pointing to a 0.5 percent advance of the Dow at the bell.
Though some in the markets question the ability of the U.S. economy to withstand higher U.S. interest rates, there is relief that the uncertainty over the Fed's intentions is coming to an end.
"Whether this optimism turns into a full blown Santa rally or not will depend on the Fed's ability to manage expectations and reassure investors than the tightening cycle will be very gradual," said Craig Erlam, senior market analyst at OANDA in London.
Most Asian stock markets are finishing with big gains as anticipation builds for the Fed's decision on whether to raise rates after seven years at ultralow levels.
Stock markets have benefited from low interest rates but a Fed rate hike can also be interpreted as a vote of confidence in the world's biggest economy. And it could weaken Asian currencies against the dollar, potentially boosting the trade-reliant region's exports.
Japan's Nikkei 225 closed 2.6 percent higher. South Korea's Kospi finished with a gain of 1.8 percent.
Hong Kong's Hang Seng rebounded from a nine-day losing streak to advance 2 percent but gains were less robust on the Shanghai Composite Index in mainland China, which closed 0.2 percent higher. Australia's S&P/ASX 200 added 2.4 percent.
Investors in Asia won't learn of the Fed's decision until they wake up Thursday morning.
European benchmarks were muted in early trading. France's CAC 40 dipped 0.1 percent while Britain's FTSE 100 added 0.3 percent. Germany's DAX was little changed.
After this week's policy meeting, the Fed is likely to keep a close watch on hiring in the U.S. construction and manufacturing industries.
Tara Sinclair, a professor at George Washington University and chief economist at the jobs site Indeed, says hiring in both industries would likely be influenced by how quickly the Fed raises rates over the next year.
Higher borrowing costs could limit construction, and higher rates could also cause the dollar to rise, making U.S. manufacturing exports more expensive abroad.
Sinclair says, "the whole objective is to move slowly enough so that there is still strong employment growth."
As of now, job postings on Indeed suggest both industries are looking to hire.
Actual hiring data tracked by the government tells a slightly different story: construction firms are adding workers, but factories are barely hiring.
Some experts say higher American interest rates could increase capital outflows from China, put downward pressure on the yuan and complicate Beijing's efforts to avoid a sharp economic slowdown.
Private sector analysts estimate November's capital outflow at $100 billion to $115 billion, up sharply from October's $37 billion.
Logan Wright, director of China market research for Rhodium Group, says Beijing's need to control capital outflows would hamper the ability of policymakers to stimulate China's slowing economy by cutting interest rates. Lower rates would reduce the appeal of assets valued in yuan, encouraging still more money to flow out of the economy.
Wright says "the potential for normalization of U.S. monetary policy should definitely be seen as a headwind for Chinese attempts to ease monetary conditions."
Asian stock markets are rising strongly ahead of the Fed's widely expected decision to raise rates for the first time in nearly a decade.
The rise is part of a global rebound that also saw U.S. benchmarks post their biggest gains in a week.
Low interest rates have been a boon for stock market investors for several years but Fed officials have telegraphed the likely decision far in advance. That has removed some of the uncertainty that investors dislike.
Japan's Nikkei 225 jumped 2.1 percent and South Korea's Kospi climbed 1.9 percent.
Hong Kong's Hang Seng advanced 2.3 percent and the Shanghai Composite Index in mainland China rose 0.7 percent.
The Fed is poised to raise short-term interest rates for the first time in nearly a decade. A rate hike will be a sign that top Fed officials think the U.S. economy is now strong enough to be weaned from the extraordinary level of support provided by the central bank.
Fed officials wrap up their December meeting on Wednesday. Markets expect them to hike the Federal Funds Rate, which is what banks charge to lend to each other overnight, by 0.25 percentage point to a range of 0.25 to 0.5 percent.
When the Fed slashed rates to near zero in December 2008, few anticipated that they would stay there for seven years. Past surveys show that many economists expected the first hike to be in 2010.
But the recovery from the worst economic downturn since the 1930s has been a long haul.