Having hit multi-week lows on Wednesday, euro zone government bond yields edged higher across the board, tracking a move in US Treasuries overnight after the Fed raised rates by 25 basis points and signalled it would begin selling assets accumulated over years of money printing. The plan would involve halting reinvestments of the growing amounts of maturing securities.
The Fed said it "currently expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated". It intends to start the draw-down with small monthly cuts of $6 billion of Treasury debt and $4 billion of mortgage-backed securities, and gradually increase them thereafter. The bond market seems to be showing less confidence in the economy than the Fed, with the benchmark 10-year T-Note yield testing its lowest level of 2017. The dollar.DXY was largely flat against a basket of currencies after reversing earlier losses, while the price of gold fell.
Michael Hewson of CMC Markets says that after spending six weeks preparing investors for the rate rise, it would have been unwise for the Federal Reserve to hold off on the increase, but the weak inflation figures, and a weak first quarter, together raise cause for concern. The 126 basis points fall in Indian bond yield and the surge of 23% in the Sensex since December 2015 pours cold water over fears of dollar outflows as a result of the Fed raising rates in the US.
CURRENCIES: The pound rose nearly a cent, from $1.2695 to $1.2781, after the Bank of England's statement - currencies tend to rise when rates increase. It is also cited that U.S. economic growth and job market strength as reasons for raising its standard interest rate. Inflation was expected to be at 1.7% by the end of this year, down from the 1.9% previously forecast. The government has achieved all its goals - unemployment is below 5 percent, inflation is about 2 percent, economic growth is about 1-2 percent.
However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
"I still expect this to be the last hike for 2017, given emerging headwinds for the USA economy, in particular for consumption, as well as the worryingly weak inflation and wage growth paths", she said.
Now the Fed said the inflation will be below its 2 percent target.
"Long term Fed expectations remain very much supported - that is the main reason why the dollar is remaining supported for now".
Shortly after the opening bell, the Dow Jones Industrial Average fell 87.86 points, or 0.41 percent, to 21,286.70.
Higher rates have come as a welcome relief to banks.