Prior to this recession, there are no financial market participants around who likely can claim that they ever recall a period of anywhere close to seven years before a change in the Federal Reserve’s interest rate policy was seen. Median projection says, FED will hike rates by 75 basis points in 2016 and 100 basis points in 2017.
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Here are three areas to follow if the Fed hikes its closely watched rate Wednesday. Interest rates have already tightened, and the U.S. dollar has strengthened, in expectation. If the rate is hiked, the greatest impact will be felt in the emerging markets, including India, whose stock markets are likely to see an exodus of foreign institutional investors, or FIIs.
More investors support the Federal Reserve holding off increasing rates than not at 64 percent and 33 respectively.
On the face of it, the Fed’s action should be good news for savers.
Finally with year-end approaching, more investors will be looking to take profits, go flat and reassess their positions after this year’s moves.
If you use the 99.75 benchmark barometer as the so-called Maginot Line for a rate hike, that might imply an 89% to 90% chance of a rate hike.
The Fed has kept the rate locked next to zero – officially 0-0.25 percent – since December 2008, having slashed it to counter the impact of the financial crisis and the economy’s plunge into recession.
But keeping the interest rates and the flow of money where they’re at now could eventually start to hurt the country by fueling a whole new problem: inflation. If the rate exceeds 6%, it dents the capacity of the Reserve Bank to reduce interest rates for the industry.
The expected move will come after years of anticipation and trepidation.
If the Fed does raise interest rates a number of times, your adjustable rate mortgage that’s 3 percent today could be 5 percent in a couple of years.
In previous articles we discussed why rate hike from FED is still crucial, despite it being well priced in, beginning of a mega unwinding of monetary stimulus, our take on USA rates via term premia and impact on equities. I get that this is more art than science, and errors will be made.
Brazil is a notable example with inflation in double figures and rates already sky high at 14.25 per cent, leaving little margin for more upward movement.
Once the Fed achieves liftoff, it will have to decide how long to wait before raising rates again. In the world of interest rates, that’s very small. “In this report we estimate the global output gap – which is still widening – and suggest how continued weak growth in much of the rest of the world, particularly in emerging economies, will exert ongoing disinflationary pressures in the USA”, the report said, then delivered the money shot. The higher interest rates that banks begin collecting from consumers also mean higher returns for people who have savings accounts or certificates of deposit, known as CDs.
Mortgage rates aren’t directly pegged to the benchmark Fed rate.
“There remains the delicate task of guiding expectations for the future path of rates”, Millan Mulraine, a deputy chief analyst at TD Securities, wrote in a research note before the meeting.
But that method will prove too unwieldy now that the Fed has amassed a balance sheet of more than $4 trillion. USA mutual fund managers have been loading up on credit in search of higher yield, but liquidity in bond markets has been severely constrained, thanks in large part to new regulation created to mitigate systemic risk in the financial system.
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So much for the economics – but political crises also comes to bear, not least in Brazil where President Dilma Rousseff is battling to stave off impeachment while the fact South African President Jacob Zuma is on his third finance minister inside a week has caused confidence and the rand to plummet. Although conventional belief is that financials are the major beneficiaries of higher rates, Credit Suisse recently discussed another approach to trading a Fed rate hike. “We’re going to stay in a tight band”.
