Shares fell in Asia on Thursday after the U.S. Federal Reserve raised interest rates, as expect. JPMorgan Chase announced earlier this year that the rate increase in March, combined presumably with growth of its loan portfolio, would equate to $400 million more in net interest income in the second quarter relative to the first.
A Washington Post report that US President Donald Trump was under investigation for possible obstruction of justice added to investor worries and undermined risk appetite.
The Federal Reserve’s decision on Wednesday to raise interest rates by 25 basis points was widely anticipated, but markets were surprised by the hawkishness in the policy statement and Chair Janet Yellen’s press conference.
Policymakers are determined not to show that they are concerned, and are noting that the weakness is likely transitory.
Most notably, the Fed outlined its thinking on how it will reduce its $4.5 trillion balance sheet – up from $900 billion pre-Great Recession after years of bond-buying stimulus.
Chris Low of FTN FINANCIAL said the Fed “compromised” by continuing the rate increases despite falling inflation, but “the market expects the Fed to take a break”.
The Fed expects that inflation will not hit the current target, of two percent, and it has revealed plans for unwinding the post-asset purchasing balance sheet, which now totals nearly $4.5 trillion.
Crude oil prices fell sharply, although due to unexpectedly large buildup in U.S. gasoline stocks. The pan-European Stoxx 600 index dropped 0.5%, led lower by the basic resources and oil and gas sectors, as the stronger dollar weighed on metals prices. The FTSE 100 of Britain dropped 1.1 percent to 7,393.
Japan’s Nikkei fell 0.3 percent.
Therefore, the worst is yet to come for the world economy if the United States keeps the current tempo of financial policy tightening or even accelerates it.
That would be followed by three rate increases next year and three more in 2019, with the key rate at 2.9 percent by the end of that period.
The euro was down 0.3% at $1.1183, a six-day low, while the yen was flat at ¥109.58 per dollar.
A number of Fed officials have spoken of the likelihood of the central bank scaling back its bond holdings which the Fed amassed after the 2008 financial crisis in order to keep long-term interest rates low to support economic growth. Bond yields hit their lowest level of 2017.
German 10-year yields, the benchmark for borrowing costs in the bloc, rose one basis point to 0.24%.
GREECE DEBT: Athens hopes to secure more bailout funds to meet a summer debt repayment hump and to force a debt relief deal at a meeting Thursday of finance ministers from the 19-country eurozone. Brent crude, used to price Global oils, fell 6 cents to $46.94 a barrel.