The stock market has reacted better than was expected following rate hikes by the US central bank. This is the first time the Fed has raised interest rates since June 2006.
Stock Markets React Positively After US Rate HikeFollowing the increase, the dollar surged against other currencies as the interest rate benchmark increased to between 0.25% and 0.5%.
In Europe, shares rallied too with the UK FTSE 100 index closing at 0.7% higher at 6,102.54 while the Frankfurt Dax in Germany spiked 2.6% and the Cas 40 in France closed at a high of 1.1%.
In spite of the positive start, Wall Street closed lower, following the afternoon trading session. The Dow Jones rose 1.3% on Wednesday but declined 1.43% on Thursday.
According to the Fed, the increase in interest rates was part of a systematic process of normalizing the rates after years of being close to zero.
Although Wall Street did not perform as impressively, analysts were still optimistic about the performance of the stock market as the year comes to an end.
Craig Erlam of Oanda trading company said, ‘There was a lot of uncertainty surrounding the Fed hike. But that has now cleared and everything is in place for a strong end to the year.”
Stocks that typically do well in a growing economy, including insurance companies, banks and automakers rose following the rate hikes.
Not as bad as expectedAn increase in interest rates makes the U.S. a suitable destination for deposits and may trigger an increased demand for the dollar.
On Thursday, the dollar rose 0.95% against the Euro and by 0.76% against the pound to €0.9255 and £0.6722 respectively.
In Britain, the price of government issued bonds rose, following the Fed rate hikes, which results into lower income or yields for investors.
According to market analysts, investors were contented that any Fed hikes that will take place in the future will be gradual. Overall, higher interest rates cause debt prices to increase.
Given that the Fed expressed dovish sentiments based on solid data, the fixed income markets responded positively.