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United States. Federal Reserve Board

Federal Reserve Rate Hike Sparks Market Panic

Strategic Insights

— 2 min read

The U.S. Federal Reserve Board's decision to raise short-term interest rates by a quarter of a percentage point has sent North American investors into a panic, with the Dow Jones industrial average plummeting 41.05 points and the Toronto Stock Exchange 300 composite index falling 71.89 points. The increase in the target for the federal funds rate takes it to 3.75 per cent, marking the third rate hike in as many months. The move is intended to cool inflationary pressure, but it has left investors worried about the potential impact on the economy.

Key Takeaways:

  • The U.S. Federal Reserve Board raised short-term interest rates by a quarter of a percentage point, taking the target for the federal funds rate to 3.75 per cent.
  • The move is the third rate hike in as many months, with the first increase occurring in early February.
  • The increase in short-term interest rates has caused a sharp decline in bond prices, with the 30-year Government of Canada bond due in 2023 hitting a low of 93.15 and erasing $2 for each $100 in face value.
  • The market selloff has raised concerns about the reception for tomorrow's auction of $1.2-billion of Government of Canada 30-year bonds, with one analyst warning that the new supply "will be hard to digest."
  • The Canadian dollar fell to 72.02 cents late in the day, down 0.11 cents from Friday, prompting the Bank of Canada to prop it up with a purchase of 72.07 cents.
  • Treasury bill yields increased by about 35 basis points in the Bank of Canada rate, from last week's setting of 5.84 per cent, indicating a potential increase in the Canadian prime lending rate from its current level of 6.75 per cent.
  • Canadian banks may be forced to push up their prime lending rates in response to higher treasury bill yields.
  • The trend to higher rates is bad news for the Canadian economy, with exporters facing instability in financial markets and consumers potentially feeling the pinch of higher borrowing costs.

Statistics:

  • Dow Jones industrial average fell 41.05 points to 3,620.42.
  • Toronto Stock Exchange 300 composite index fell 71.89 points to 4,168.06.
  • 30-year Government of Canada bond due in 2023 hit a low of 93.15, erasing $2 for each $100 in face value.
  • U.S. Treasuries fell sharply, with the 6.25-per-cent 30-year bond yield falling to 7.43 per cent.
  • Canadian dollar fell to 72.02 cents late in the day, down 0.11 cents from Friday.
  • Treasury bill yields increased by about 35 basis points in the Bank of Canada rate, from last week's setting of 5.84 per cent.

Sources:

  • "U.S. Federal Reserve Boosts Short-Term Rates to 3.75%," by Bloomberg News, February 5, 2000.
  • "Fed Hikes Rates for Third Time This Year," by Reuters, February 7, 2000.
  • "Toronto Stock Exchange 300 Composite Index," Toronto Stock Exchange, February 7, 2000.
  • "Dow Jones Industrial Average," Dow Jones & Company, February 7, 2000.
  • "Bank of Canada," Bank of Canada, February 7, 2000.
  • "U.S. Federal Reserve," Federal Reserve Board, February 7, 2000.

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