Fed Hikes Rate. Now What?

The anticipated rate hike finally happens, with solid good forecasts of the economy. 

Are these still the days when Fed’s Janet Yellen should be “ashamed” of the low interest rate policy? Trump’s statements are not forgotten yet, and they considered as accusations. The Federal Reserve hiked the interest rate by a quarter-point in December 2016, in one of its eight meetings in a year.  Since the 2008 Great Economic Recession, the projected Fed rate hike will mark the third interest raise in history. The Fed funds rate is aimed at stemming recent bleeding in the stock market.

Fed fund rates allow banks to lend out excess reserves stored in the bank, to each other. Therefore, a rate hike would mean that banks would make more money for the exchange. Though this is a short-term interest rate benchmark in the US, other interest rates will respond accordingly. The consequence is that banks get higher interest income resulting from higher loan yields. The prospective Fed interest rate hike would mean a boost to most banks, such as the JPMorgan Chase, and the Bank of America. These banks have struggled since the financial crisis to earn investors base expected of their market occupancy. Raising interest rates could help fix the issue. The rate hike was a much anticipated one.

There are two wide opinions about the rate hike and the aftermath. While Yellen maintains that rate hikes will gradually come through and that they are inevitable, there is another opinion that the hike has come too soon, and at a time when inflation is decreasing and not increasing, as it should have been. But, Yellen’s statements come with a strong notion that the economy will recover in the near term. Well, it is also possible, with investments and employment rates growing gradually in the recent months.

The US economy has registered growth for the last 30 quarters with no signs of lagging off. Latest jobs have increased employment, while consumer spending has grown strong. Accordingly, spare capacity in the labour market segment is disappearing quickly, an indicator of rapid wage-rise in the foreseeable future. Subsequently, higher wages would mean higher demands – triggering higher product prices. Hiking interest rates would enable Fed to control inflation as well as maintain high employment levels.

Fed anticipates that businesses will shake off extra borrowings to continue investing in the US economy, and thence creating jobs. The policymakers expect the current economic strength to override several rate hikes, raising the base rate to about 2% by end of the year. Also, consumers have embraced tax cuts and deregulation rhetoric to increase spending inspite of possible mortgage cost uptrend.

What the Interest Rate Hike Means to Us

Credit card rates will proportionately respond to the Fed move. This implies that a quarter-point increase by Fed will translate into an extra 0.25% increase in credit card holder interest pay. Only those with fixed rate cards will be safe from the higher rates.

Home mortgage rates are bound to move up, although it is not always the case, based on Fed moves. However, based on the synergy of a strong economy and Fed fund rate hikes, mortgage rates have been on an uptrend for the past few months. Consequently, homes will be less affordable as mortgage payments become more expensive. As the Mortgage Bankers Association predicted, refinancing activity is bound to drop to an estimated 46% this year following higher rates.

Home equity lines of credit are associated with prime rate – which is not set by Fed. Nevertheless, prime rate is determined by the Fed Fund Rate. A Fed Fund rate hike would stumble the bullish market, raise returns on bonds, and finally slip the economy into stagnation temporarily, but as long as the economy shows resilience, it is bound to pick up.

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