The data simply proved too strong: as expected, the Federal Reserve has increased the base US interest rate to 75bps amid strengthening economic indicators. These include:
•Growth: GDP increased at an annualised rate of 3.2% in Q3, and was followed by a recent surge in services activity last month
•Unemployment: the jobless rate fell to 4.6% in November, its lowest level in more than nine years
•Inflation: the Consumer Price Index rose 1.5% in the year to September, suggesting that inflationary pressures are rising
The central bank’s willingness to hike was evident in the Federal Open Market Committee’s minutes from its November meeting, which stated: “Members generally agreed that the case for an increase in the policy rate had continued to strengthen”.
Our view is that US interest rates will likely continue to chart an upward trajectory as the extraordinary monetary policies of the post-financial crisis era give way to pro-growth fiscal stimulus and deregulation. We believe that this environment favours small- and mid-cap (SMID) stocks.