Current Environment - Macro Overview

  January 11, 2016

The Federal Reserve finally executed an anxiously anticipated rate increase, the first since 2006. Improving U.S. employment was the catalyst behind the Fed’s long awaited move, with the rate increase seen as a validation by the Fed that U.S. economic growth is intact.

The actual rate that the Federal Reserve increased was the Federal Funds rate, from a range of 0.0% to .25% to a range of .25% to .50%. The rate indirectly affects other borrowing rates set by large commercial banks, such as the prime rate. Minutes following the Fed’s announcement, a major U.S. bank announced it was raising its prime
rate from 3.25% to 3.50%. The prime rate is the interest rate commercial banks charge their so-called best customers. Once one bank announces an increase in its prime rate, other banks will follow suit.

A 40-year ban on U.S. oil exports was lifted by Congress allowing U.S. companies to once again export and compete in the world oil markets. Substantial increases in U.S. oil production and an ample surplus of oil helped lead to the dismantling of the decades-old rule. U.S. equity markets ended lower for the year, yet resilient given the challenges that markets had in 2015. Disappointing corporate earnings, declining commodity prices, and dismal global growth all added to the duress experienced
throughout 2015.

Oil’s steep descent in 2015 roiled world energy markets as an over supply of oil and weak demand dragged prices to 11-year lows in December. Both oil benchmarks, Brent and West Texas Intermediate (WTI), were off over 30% for the year. 

Inflation remained tame in 2015 as low commodity prices and anemic global growth kept consumer prices at bay along with minimal wage growth. The Fed is forecasting a gradual elevation in inflation, thus substantiating the case for its rate increase trajectory.

 

Sources: Federal Reserve, EIA

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