“Unfortunately”, he said, “higher rates aren’t going to filter down to savers”. In the past, bond yields have tracked the Fed’s main interest rate, and in turn been able to guide all interest rates in the economy. What interests me as a trader and investor, however, is what is happening now that the well-telegraphed policy change is imminent.
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After keeping borrowing costs super-low to boost spending and mend an economy that was bashed by a financial crisis, Fed Chair Janet Yellen has said the labor market has sufficiently improved, and she’s confident that inflation would follow suit. Writing of Yellen’s views in early 1995, Bob Woodward would look back and recall that Yellen “thought that every time she walked into the meetings she heard the same arguments: The economy is hot, we have to raise rates”.
Still, it won’t be a game changer overnight.
First, the Fed is pledging to raise interest rates very gradually. Then investors remember why the Fed is moving – because the economy is doing well – and markets usually end up higher a year later.
The Fed has held short-term rates near zero for seven years. For consumers, mortgage rates, auto loans and credit card rates will rise. Unlike Goldman Sachs, who has predicted a series of predictable interest rates hikes during the odd election year that is 2016, HSBC is in the camp that says don’t raise rates until the whites of inflation’s eyes are present, and that might not happen on a global stage.
Contrary to stock prices, currencies do not appear to be too influenced by the Fed’s monetary policy moves. It’s expected to go up to 0.25-0.50% – or by 25 basis points.
According to HSH.com’s Weekly Mortgage Rates Radar, the average rate for conforming 30-year fixed-rate mortgages didn’t budge, remaining at 4.01 percent.
Housing: Mortgage rates aren’t directly pegged to the benchmark Fed rate. That increase in production was generally planned and began a year ago, when commodity prices were high and is, in a theoretical sense, a wonderful example of simple supply and demand in action. Savers, hoping to collect more interest on their bank accounts, are likely to be disappointed, he added. The basic way of understanding Federal Reserve interest rates is lowering the rates makes it cheaper to borrow money, stimulating the economy.
Stock market investors are ready, but they may not be fully prepared for all of the nuanced remarks likely to accompany that announcement. Just the reality of it plopping in their laps is going to create some volatility, not only in the bond markets but also the equity markets as people try to sort this out. Or it might lift American (and Canadian and global) stocks as investors interpret lift-off as a vote of confidence in the US economy. This is unwelcome news for the USA energy industry as declining oil prices have already put high-cost producers, especially the fracking sector, on the ropes financially. The repo rate is the rate at which the central bank of any country lends money to commercial banks.
Rather, banks are looking forward to raising interest rates on borrowers, fattening their bottom line.
Are rising US interest rates good, bad or indifferent?
That’s great news for world travelers, but it would hurt all types of USA companies that sell products overseas.
When in the past high employment and low interest rates could have been depended on to generate positive inflation, showing signs of economic life, that isn’t happening during this quantitatively infused and stimulus driven market environment.
Others are getting out of emerging markets like Turkey and Brazil. The Bank for International Settlements estimates that non-bank borrowers had outstanding dollar loans worth $9.8 trillion towards the end of June 2015: $3.3 trillion of these loans were taken by borrowers from emerging markets.
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Once the dollar’s value rises, those loans get more expensive and hard to pay back.
