“While interest rates charged on revolving credit [like credit cards and home equity loans] are pegged to the target Federal funds rate, credit card rates in particular have a large variable spread component”, she writes.
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Tomohisa Fujiki, head of interest-rate strategy for Japan at BNP Paribas SA in Tokyo, is already looking past the decision this week.
The expected move will come after years of anticipation and trepidation. On the other hand, the economic logic of the “lag” cuts two ways, requiring caution in tightening as well, lest the Federal Reserve err in the direction of too much restraint, which it can not reverse later.
Domestically, the Fed risks raising rates too early and being met with deteriorating economic activity over the first half of 2016 as a result.
Relax, Fed watchers. Take a deep breath.
The consultancy added that the impending rise comes against a largely favourable economic backdrop and has been priced in by traders.
“It is possible, though unlikely, the traditional models are just all wrong (and) we’re in a whole new world”.
“I don’t think the Fed will be overwhelmed by things like fund redemptions”, said Kelvin Tay, regional chief investment officer at UBS Group AG’s wealth management business in Singapore.
Many analysts expect Brainard, who has emerged as the leader of the Fed’s cautious faction, will accept a first hike without dissenting, but could need more convincing for subsequent rate rises. Such “revolving” credit accounts for about 6 percent of household debt, according to Federal Reserve data.
For example, student loans tend to be offered at a fixed rate.
Total consumer debt across the nation remains below its 2008 peak of almost $13.9 trillion.
There is a feeling that huge amounts of volatility will follow the Fed announcement, but the market has had so long to digest the idea of slightly higher rates that we expect the reaction to be muted.
While unemployment has fallen to 5% in the United States, and the economy has been creating an impressive number of new jobs every month – over 200,000 this last November – wages remain flat and labour force participation rates, defined as the ratio between the aggregate labour force and the overall working age population, have yet to recover.
First, the Fed is pledging to raise interest rates very gradually. “The last two are unaffected by interest rates and you’re really not going to stop being able to pay for it because of an increase in interest rates to 0.5% from 0%”.
“Higher U.S. borrowing rates will also be bad news for indebted emerging market economies”.
A poll of economists conducted by Financial Times, show economist are well divided in their expectations for rate hike path. It means there will likely be more increases in the near future (the next 1-2 years), and that eventually will mean higher interest income on your deposits. “But the reality is that a 5 percent interest rate is still cheap money”. As a general rule, when 10-year Treasury yields go up, mortgage rates go up.
The latest US economic numbers make the case for an imminent Fed rate hike even stronger.
“The real estate economy is more sensitive to interest rates than most of the economy”, Wake said.
Now, financial markets are all but certain that the Fed is ready to start pulling back. Yellen’s recent comments have implied that it would require a significant shock to derail plans for higher rates. It may be one of the reasons that the RBI (Reserve Bank of India) did not lower the interest rate in its bimonthly review on December 1, 2015.
Developing nations’ central banks are pinning their hopes on a moderate rise to ensure the Fed does not make their task of keeping their own situation on an even keel insurmountable.
Some banks will benefit more than others, said Marinac, the expert at FIG Partners.
Futures in crude oil reached a low of seven years while the euro which is expected to fall against the USA dollar as the monetary policy tightens, rallied after many had covered those particular bets.
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Companies small and large have to borrow to buy equipment, hire more employees, and keep the lights on and workers paid when there are gaps in cash flow.
