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Published: Sat, December 17, 2016
Economy | By Melissa Porter

Stocks fall after Fed rate hike, dollar and bond yields jump

Stocks fall after Fed rate hike, dollar and bond yields jump

The dollar charged to an nearly 14-year high and government bond yields rose sharply on Thursday, after the Federal Reserve hiked U.S. interest rates and signalled more would follow at a faster pace next year.

In the realm of auto loans, even though the trend has been toward longer loans and more expensive cars, the Fed's rate hike affects monthly payments only modestly. Solid job growth and falling unemployment helped persuade Fed policy makers to raise interest rates on Wednesday for the first time in a year. Its expectation of three rate increases in 2017 is up from two in its forecast three months ago.

Fed Chair Janet Yellen also cited an improving labor market and evidence of faster inflation for its 2017 rate outlook.

China's central bank reacted to the Fed's move by setting the yuan mid-point at 6.9289 to the dollar, its weakest since June 2008, though market players noted that the yuan has been firmer against many other currencies and rose on trade-weighted basis. The HKMA's chief executive, Norman Chan, said local interest rates will continue to track movements in the USA and "the rising trend is expected to continue to be affected by the scale of outflows from the Hong Kong dollar, global developments and other factors". Fed governors now anticipate three further quarter-point rises in 2017, compared to two previously, and further rises in 2018 and 2019.

The Fed's action Wednesday should have little effect on mortgages or auto and student loans.

The interest rate that the Fed controls affects what banks pay to borrow money from each other.

People with variable-rate debt, especially adjustable rate mortgages or home-equity loans, will see the biggest impact, said Greg McBride, Bankrate.com's chief financial analyst. Those rates are based on benchmarks like banks' prime rate, which moves in tandem with the Fed's key rate. The central bank also opted to hike interest rates by 25 basis points in a unanimous decision, putting the fed funds rate at 0.5% to 0.75%.

The dollar has significantly strengthened since the U.S. election at the beginning of November on Trump's promises of fiscal stimulus and greater economic growth.

The Fed's policy meeting was the first since the U.S. election victory of Donald Trump, who investors expect to drive up inflation and boost growth with a program of huge fiscal expansion.

Yellen said such policies would be unlikely to maximize employment, since the unemployment rate - 4.6 percent, a nine-year low - is now slightly below the Fed's own long-term target. The prices fell to $1,136.4 an ounce earlier in the session to their lowest since February 1 and registered their biggest percentage fall in one month.

Inflation expectations have climbed since Donald Trumps surprise victory in last months election, but inflation still remains relatively tame. It sent the dollar soaring against all major currencies including the pound and euro. "We hadn't expected a hawkish message from the Fed and we hadn't expected this kind of dollar strength either", said Barclays currency strategist Hamish Pepper, in London.

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