What You Need To Know About A Fed Rate Hike
$USO, $UGA
America is not going Out of Business.
Since Y 2008, the US Fed has kept the federal funds rate, the banks’ overnight borrowing rate, near Zero.
Now more confident about prospects for growth and inflation, Fed policymakers are preparing to raise those short-term rates, perhaps at the conclusion of the meet this week or later this year.
Higher borrowing costs for banks can cause mortgage rates to rise, jobs to become scarcer and stock to fall.
There are 5 things you need to know, as follows:
1. Mortgage Rates Are Not Likely to Rise Much : The impact of Fed tightening importantly depends on whether increasing the federal funds rate pushes up the 10-year Treasury rate, because rates on mortgage, corporate and municipal bonds follow that rate up and down.
When the Fed pushed up short rates in Ys 2004-2005, the long rates hardly moved, because the Chinese government was purchasing US Treasuries to keep the RMB Yuan cheap Vs the USD.
Now Beijing is selling Treasuries but private investors in Asia, doubting prospects for the world’s 2nd largest economy, are rushing into US securities and other assets.
Since the Chinese stock market began its correct in June, the 10-year Treasury rate has fallen from 2.50 to 2.32% despite statements from many Fed officials about raising rates in here.
2. Bank fees and car loans will get more expensive New banking regulations designed to prevent a repeat of the Y 2008 financial meltdown have pushed up banks’ costs for providing ordinary retail services. Higher short-term borrowing rates for banks will make things worse and look for banks to further boost fees on checking accounts and other services, and charge higher rates for short-term credit—credit cards, car loans and home improvements.
The Good News: banks may start competing more for your money and pay higher rates on 1 to 5-year CD’s.
3. Unemployment Will Not Be Affected Much: A stronger USD and lower Crude Oil prices are causing stress in many manufacturing industries and the Oil Patch but the jobs market continues to improve a bit. Finding a job remains toughest for the long-term unemployed whose skills atrophied during the Great Recession and slow recovery, and for whom government benefits expanded Medicaid and food stamps for healthy men have often overwhelmed incentives to educate and re-skill.
If 6 years of rock bottom interest rates did not get idle workers off of couches, a few more years of that policy will not help.
4. Economic Growth & Inflation Will Pick Up: Household balance sheets are in their best shape since the recovery began and lower gasoline prices may continue to boost retail sales. Those factors might best the consequences of higher short-term interest rates and drive the economy ahead. Overall, if Beijing can mount an adequate stimulus program to stabilize its economy, the global economy will not sink America’s boat and job gains will continue.
Once Gasoline prices have bottomed, overall inflation could rise to about 2% in the long term.
5. Stock Prices Will Continue to Be Strong: Problems in China and shifts in the broader global economy have driven stock prices, and the initial Fed interest rate increase will add to the volatility. But, after removing uncertainty about when rates will to start to climb could help calm the stock markets.
Economists note: The economy has emerged from a tough recession and slow recovery, in which the Fed deemed ultra-low interest rates necessary but in the past decades, the stock market has moved upward solidly with short rates in the range of 3 or 4%. Barring a meltdown in China, that is likely to happen again.
America is not going Out of Business.
Stay tuned…
HeffX-LTN
Paul Ebeling
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