The Federal Reserve appears all but certain this week to raise interest rates for the first time in almost a decade, but after markets move, politicians react, and investors adjust their bets, those rates will remain near rock-bottom levels and stay there for some time to come.
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After holding the interest rate they control at around zero for exactly seven years, later this week the Federal Reserve is likely to raise its target rate to 0.25 percent. On Wednesday, it’s expected to modestly raise that range to between 0.25 percent and 0.5 percent.
Generally an increase in interest rates is good for CD holders but don’t expect immediate relief. What is not yet clear is whether the change will be for the better. Economists expect the Commerce Department to announce that housing starts rose 6.6% last month to a seasonally adjusted annual rate of 1.13 million.
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 divergence between interest rates in America versus other countries is expected to cause the US dollar to become stronger.
The October and November US employment reports bolstered confidence in the trajectory of the economy, with the jobless rate down to 5%. Some 62 percent don’t expect the Fed’s preferred inflation index, the personal consumption expenditures price index, or PCE, to achieve a third consecutive month of 2 percent or higher readings until 2017 or later.
Market watchers are all but convinced that the United States central bank will lift rates from ultra-low levels tomorrow (Thursday morning Singapore time), as a mark of the economy’s recovery since the global financial crisis. Those sectors had it rougher in 2015, with volatility increasing as a possible Fed rate hike started to dominate market discussion.
“Weaker growth in the emerging markets and easing tailwinds from the FX market will weigh on business sentiment”.
Underlying all this uncertainty, there is a huge debate going on in the financial media about whether the USA economy is “mid-cycle” or “late-cycle”.
Median projection says, FED to hike rates four times in 2016 of total 100 basis points.
The other key question macro-strategists are asking with respect to the timing of the Fed lift-off is whether or not monetary policy will be back to “normal” at the onset of the next recession.
“Most banks are already flush with deposits and will see a Fed rate hike as an easy way to boost their margins”, he said.
Also some investors are pulling their money out of global investments and parking it in the US – higher rates make assets priced in dollars more attractive. So yes, rates will likely be higher in a year but still low when compared to historical averages.
“I tend to think from a 30-year fixed mortgage standpoint there’s not going to be an extraordinary change”, he said. He argued that the central bank has eliminated a tool to fight recessions in the future by keeping rates too low for too long.
The Fed has been mulling over the increase for a while now, but the biggest thing you need to know is that if rates do go up, there’s no need to panic. By this logic, raising interest rates may catalyse growth and investment and, in so doing, actually lead to inflation. “Our base rate already reflects the expected rate increase, and we have enough time to respond to it”.
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Greg McBride, chief financial analyst at Bankrate.com, said the Fed’s low interest rate policy has “crushed savers over the past several years”.
