REPORT
By Övünç Kutlu
U.S. letter week beginning Dec. 19

What happened last week?

The most important development last week was the U.S. Federal Reserve increasing its benchmark interest rate on Wednesday.

The Fed raised its interest rate by 0.25 percent, marking its first rate hike since last December and only the second in a decade. After keeping rates unchanged in the past seven meetings, all 10 of the Federal Open Market Committee (FOMC) members unanimously voted in favor of raising the range for the federal funds rate to 0.50 - 0.75 percent, from 0.25 - 0.50 percent. 

The FOMC also noted that it now expects to increase rates three times in 2017, from the previous projection of two rate hikes.

After the central bank’s announcement, the Fed Chair Janet Yellen said in a press conference that some of the FOMC members factored President-elect Donald Trump's economic proposals into their projections for 2017.

During his campaign, Trump said the Fed's low-rate policy created a "false economy" and Yellen "should be ashamed" of keeping rates low.

Yellen, however, did not provide an official response to Trump’s statements, but said at Wednesday’s conference "I'm not going to give the incoming president advice about how to conduct himself in policy … I'm a strong believer in the independence of the Fed ... We have been given the independence by Congress to make decisions about monetary policy." 

The FOMC’s statement said the rate hike decision came "in view of realized and expected labor market conditions and inflation … Job gains have been solid in recent months and the unemployment rate has declined.”

The Fed also added that it expects the American economy to grow by 1.9 percent in 2016 and 2.1 percent in 2017, both 0.1 percent higher than the central bank's projections at its September meeting. The estimates of unemployment rates were also lowered by 0.1 percentage points. The bank projects that the unemployment rate will average 4.7 percent and 4.5 percent this year and the next, respectively. Inflation is anticipated at 1.5 percent in 2016 and 1.9 percent in 2017.

After the Fed's rate hike decision, the U.S. stock market moved into negative territory, the value of the U.S. dollar increased against other currencies, and crude prices climbed in the global oil market. 

Although considering the value of other currencies, the recover in the U.S. stock market and in oil prices over the following two days, there was volatility in the market on Thursday and Friday.

Although the central bank announced Wednesday it now expects to increase rates three times next year, from the previous projection of two rate hikes, Richmond Fed President Jeffrey Lacker made hawkish comments on Friday about the number of rate hikes next year.

"My guess would be more than three." Lacker said. After his comments, investors’ concerns over multiple rate hikes resurfaced and they took a selling position in the stock market.

Macroeconomic data announced last week was mixed.

Retail sales rose only 0.1 percent in November, marking the lowest level of increase in the past three months, and coming below the market expectation of a 0.3 percent rise. Retail sales in October were revised down from 0.8 percent increase to 0.6 percent rise.

Producers’ Price Index jumped 0.4 percent in November, beating the expectation of a 0.2 percent increase, and marking the strongest rise in the past five months.

Industrial production, however, decreased 0.4 percent in November showing the worst performance in the last eight months. The market projected industrial production to fall by 0.3 percent.

Consumers’ Price Index, which the Fed watches closely for its inflation target of 2 percent, rose 0.2 percent in November and 1.7 percent year-over-year.

 

What to expect this week?

It will be a calm week in terms of macroeconomic data. Investors and the markets will continue to watch data and follow the Federal Open Market Committee (FOMC) members’ statements to find hints of the number of possible rate hikes next year.

The Fed Chair Janet Yellen will make a speech Monday at the University of Baltimore fall semester graduation ceremony. Investors and markets will closely watch Yellen’s comments about the well-being of the American economy, projections and possible rate rises in 2017.

On Wednesday, existing home sales in November will be announced, and changes in the U.S.’ weekly crude oil and gasoline inventories will be revealed.

Thursday will be a busy day for macroeconomic data. Durable goods orders in November and continuing jobless claims will be announced.

Investors and markets, however, will focus more on Thursday on the third quarter gross domestic product and consumer spending. Personal income and personal spending in November will also be announced on Thursday.

 

19 Dec,2016

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