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US Fed raises rates: The beginnings of a Santa rally?

In a historic event, the US Federal Reserve has raised interest rates for the first time in nine years by 0.25%, to an effective range of 0.25% to 0.5%.

Turns out, it’s not as scary as the markets thought, with the Dow Jones and S&P 500 both soaring in late trading – up 1.1%. The main reason rates are rising is that the US economy is recovering, following years in the doldrums post the Global Financial Crisis.

The US central bank also flagged that interest rates are likely to rise slowly, implying four rate rises this year – but is still highly dependent on the economic outlook. In other words, if the rate hikes cause any further deterioration in the US economy, the pace of hikes will be paired back.

In particular, the bank will be watching inflation like a hawk.

Slow and steady appears to be the call.

For Australian investors, there’s no reason to panic, although, after 9 years of virtually 0% US interest rates, it’s something that global markets will take time to get used to. The US rate rise is really a show of confidence in the US economy, which could filter through to our market – and we could see the start of a Santa rally from today.

For companies with US denominated debt, it will likely mean higher borrowing costs, but for companies like QBE Insurance Ltd (ASX: QBE) and Computershare Ltd (ASX: CPU), it’s nothing but good news. Both companies have vast amounts of capital earning virtually nothing – higher interest rates will be a positive for both companies.

The Australian dollar exchange rate versus the US dollar could come under pressure – as the US dollar becomes slightly more attractive while commodities prices are likely to slip again – most are priced in US dollars – bad news for our commodity giants.

Foolish takeaway

For Foolish investors, the strategy remains the same, finding underpriced, high-quality companies holding for the long term and regularly contributing funds to your portfolio.

Let the rally begin.

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Motley Fool contributor Mike King has no position in any stocks mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia owns shares of Computershare. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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