The Fed's historic rate hike: What you need to know in 6 points

(THESTRAITTIMES)TheFederalReserve'spolicymakersmetforthefinaltimethisyearonWednesday(Dec16)andannouncedthefirstUSinterestratehikesinceJune2006,andsevenyearsafteritpusheditsbenchmarklendingratetozerotobattletheglobalfinancialcrisisandtheGreatRecessionthatfollowed.

HigherUSinterestrateswillhavefar-reachingimplicationsforeverycorneroftheworldeconomy,fromyourhomeandcarloans,companiesandgovernments'borrowingcosts,tothevalueofcurrenciesandcommodities.

Here'swhatyouneedtoknowinsixpoints:

1.WhatdidtheFeddo?

TheUScentralbankraiseditsbenchmarkfederalfundsratebyaquarterof1percentagepointto0.25-0.50percent,sayingtheUSeconomyisgrowingatamoderatepaceandshouldacceleratenextyear.

Themovewaswidelyexpectedbutneverthelessmarkedtheendofanera-almostadecadelong-inwhichtheFedpumpedtrillionsofcheapdollarsintotheUSeconomytofuelwhatturnedouttobeaverylongrecovery.

2.Whyhikeratesnow?

TotheFed,arateincreaserepresentsavoteofconfidenceintheUSeconomyafteralong,unevenrecoveryfromtheglobalfinancialcrisisanddeeprecession.

FedofficialsnowseeaUSeconomythathasmadeenoughprogresstowarrantaslowretreatfromcheapmoney.TheUSjoblessratehashalvedto5percentinNovemberfrom10percentin2009andeconomyisgrowingatrobust2.1percentannualrate.

InflationisstillbelowtheFed's2percentgoalbutofficialsbelieveitwillrisein2016asslackinthejobmarketdiminishesandoilpricesstabilise.

EconomistsalsoargueitishightimeUSrateswereraisedtopreventexcessiveconsumerborrowingandbubblesemerginginthehousingmarketandothertypesofassets.

3.Whatdidthefedsayaboutthefutureratehikes?

Itstressedinmanywaysthattheywillbe"gradual".

-Initsstatementontheraterise,theFedsaidit"expectseconomicconditionswillevolveinamannerthatwillwarrantonlygradualincreasesinthefedfundsrate".Tohammerhomethispoint,itaddedinasecondplaceinthestatementthatitanticipated"gradualadjustments"inrates.

-TheFedalsostressedthatwhenitmovesnextwilldependonUSinflation.Initsstatement,theFedsaiditwould"carefullymonitor"actualandexpectedprogresstowardsitsinflation-implyingitwillbereluctanttoraiseratesagainunlessitseesinflationactuallymovingup.

-TheFedalsonotedinitsstatementthatitwillnotshrinkitsportfolioofmortgageandTreasurysecurities-anotherwayofpumpingcheapmoneyintotheeconomy-untilrateincreaseswere"wellunderway".TheFedhasassetsofUS$4.5trillion(S$6.3million)andshrinkingtheportfoliocouldshakeupmarkets.

-DrYelleninapressconferencesaidthebenchmarkrate"remainsaccommodative",whichisFedjargonforalevellowenoughtostimulateeconomicgrowth.

4.Sohowmanyratehikescanweexpect?

Fourquarter-percentage-pointrateincreasesin2016,fourin2017andthreeorfourin2018.

ThisisgoingbynewprojectionsofwhatFedofficialsexpecttheirbenchmarkratetocreepupto-1.375percentbytheendof2016,2.375percentbytheendof2017and3.25percentbyend-2018.

Note:ThisisaslowerpacethanprojectedbyFedofficialsinSeptemberandmuchslowercomparedtoearlierseriesofFedrateincreases.Inthe2004-06period,forexample,theFedraisedrates17timesinsuccession.

5.Whydoesausratehikemattertotherestoftheworld?

Astheworld'slargesteconomy,whathappensintheUSripplesouttoprettymucheverywhere.

WhiletheFedfundsrateiswhatUSbankspayeachotherforovernightloans,itsetsthebasisforlonger-termratesthroughouttheglobalfinancialsystemfromhomeandcarloanstocorporateloansandnationaldebt.

Singaporehomeownerswithmortgagesorbusinesseswithcorporateloanswillneedtofactorinhigherpayments.

Ontheplusside,saverswhohaveseenyearsofverylowdepositratesarelikelytobebetterrewarded.

6.Whowillbemostaffected?

Thosewhoborrowedmostheavilywillbemostaffected.EconomistsaremostconcernedforemergingmarketslikeTurkey,BrazilandRussiawhosecompaniesandgovernmentshaveborrowedheavilyinUScurrencyandwillnowfindithardertoserviceexistingdebtandattractnewinvestment.

AneraofrisingUSinterestratesislikelytostrengthentheUSdollar.ManycompaniesandcountriesinemergingmarketshaveraiseddebtinUSdollarsbutearnmuchoftheirincomeinalocalcurrencysoservicingtheirdebtwillbecomemoreexpensiveastheUSdollarrises.

RisingUSinterestratesalsoaffecthowinvestorsviewrisk.IftheycanearnamoreattractivereturnoninvestmentsintheUS,theymightshuninvestmentsintheseriskiernations.

Higherinterestratesalsocomeatabadtimeformanyemergingeconomies,particularlythosethatrelyonexportingcommodities.Thepriceofoil,metalsandagriculturalcommoditieshaveplungedsocompaniesandgovernmentscouldfacehigherborrowingcostsatatimewhenearningsfromminingandagriculturearefalling.

AndbecausecommoditiestendtobepricedinUSdollars,anyappreciationislikelytotriggerfurthercommoditypricefalls.

InvestorshavealreadywithdrawnanetUS$500billionfromemergingmarketsin2015,thefirstannualoutflowindecades.ThequestionnowiswhethertheFedmoveprovokesastampede.

Manyemerging-marketcurrenciesarealreadyunderpressureasinvestorsworryaboutthehealthofthoseeconomies.

Ontheupside,thestrongerUSdollarmightbegoodforEuropeanandAsianeconomiesasitmeansexportstotheUSwillbecheaper.