Thursday, 17 December 2015

Fed hikes rates, stocks rise but oil companies at risk

The Federal Reserve raised interest rates for the first time in almost a decade on Wednesday. Bloomberg reports:

The Federal Open Market Committee unanimously voted to set the new target range for the federal funds rate at 0.25 percent to 0.5 percent, up from zero to 0.25 percent. Policy makers separately forecast an appropriate rate of 1.375 percent at the end of 2016, the same as September, implying four quarter-point increases in the target range next year, based on the median number from 17 officials.

Treasuries fell on Wednesday. The yield on the two-year note in particular reached a 5-year high of 1.021 percent.

However, stock investors reacted positively. The S&P 500 rose 1.5 percent.

Gold, silver and copper also rose but oil fell after US crude inventories were reported to have risen to the highest level for this time of year since 1930.

Indeed, Nick Cunningham thinks the Fed rate hike "couldn’t come at a worse time for the oil and gas industry".

He said that "the oil boom was fueled by loose money from the Fed".

Higher interest rates will raise the cost of money and make borrowing more expensive.

"If that means more drillers lose their access to finance, or are unable to tap finance at reasonable rates, more companies could go bankrupt," he wrote.

Also, higher interest rates will strengthen the US dollar, and with crude oil priced in dollars, the Fed hike "could put downward pressure on oil prices".

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