US Fed raises interest rates but maintains cautious outlook

Federal Reserve Board chairwoman Janet Yellen holds a news conference following a meeting of the Federal Open Market Committee on Wednesday. Chip Somodevilla / Getty Images / AFP

The US Federal Reserve has raised its benchmark interest rate for only the third time in the last ten years, in a move broadly in line with analyst expectations.

US stocks and bonds strengthened on the move, on Wednesday evening UAE time, with oil prices strengthening above $52 a barrel in early Thursday trading.

The US central bank raised its key rate target to 1 per cent from 0.75 per cent, in the wake of optimistic solid jobs data for February together with a rise in inflation.

But in a surprise move, the Fed resisted pressure to speed up its timetable for rate rises for the rest of the year, keeping its projections of three rate rises for 2017 intact in line with its December timeline.

“There was no hint at an accelerated pace of tightening beyond what the markets knew already, and economic forecasts were left largely unchanged,” said Tim Fox, chief economist at Emirates NBD.

“As such [market] interest rates and the dollar both moved lower.”

The US Dollar Index, which measures the performance of the greenback against its global peers, fell in early Thursday trading after falling nearly a per cent on Wednesday, hitting its lowest level in a month.

The UAE, Saudi Arabia, Bahrain and Kuwait have all already raised interest rates in line with the Fed’s move, due to their currency pegs to the US dollar. Qatar’s central bank is expected to follow suit shortly.

Economists have previously warned that the monetary tightening resulting from higher interest rates would affect growth across the Arabian Gulf, with local businesses less able to access bank credit.

"At the margin there could be an impact, adding to headwinds the economy already faces from a strong dollar," Mr Fox told The National.

“However, other indicators suggest the non-oil private sector is picking up momentum even in the face of this, and of course the stronger global economy is starting to provide a small tailwind to GCC growth.”

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