News Worms
News Worms

What a Fed rate hike means for you

Turbulence could come from the foreign exchange markets if the dollar rises following a slump in the Turkish lira, Indonesian rupiah, Mexican peso or other developing world currency.

Usually, rising interest rates are bad news for stocks because they make borrowing more expensive and can put the brakes on economic growth. Now China is letting the yen fall and with interest rate rises in the U.S. pushing up the dollar, the gap will widen, increasing the cost of U.S. exports and reducing import prices.

The Fed's benchmark rate, after modest increases in December 2015 and December 2016, now stands at a range of 0.5 percent to 0.75 percent, still quite low by historical standards.

Lindsey Piegza, the chief economist at Stifel Nicolaus & Co., said the civilian labor force increased by almost 250,000, indicating that more people started looking for a job last month.

The Federal Reserve raised the base interest rate by a quarter of a percent in December past year and is expected to follow with a further rate rise on Wednesday.

Economists also rated a potential external shock to the economy and an abrupt tightening of financial conditions as riskier propositions than the spectre of an overshoot on inflation caused either by declining unemployment or an expansionary fiscal policy.

Yes, a quarter point rate hike could bring up the average mortgage by $40 a month, the dollar will strengthen and some worldwide companies could cut their numbers.

After the payroll (data) on Friday - the last piece of data that could derail the hike - and given how well forecast the Fed decision is, I don't think there'll be any surprise and knee-jerk reactions.

CHECKING ITS OPTIONS: Pharmaceutical company Cempra rose 15 cents, or 4.2 percent, to $3.75 after it said it hired Morgan Stanley to help it figure out how to best use its cash.

After leaving rates near zero to heal the post-recession economy, the Fed has raised rates only twice in this economic cycle.

"All attention is likely to be focused on the press conference to see whether a more hawkish tone is struck, if so yields and the dollar could move higher still".

"There has already been a moderate increase in Eibor [Emirates Interbank Offered Rate] from end-February with the rising expectation of a U.S. rate hike".

The Fed's response to the policies of US President Donald Trump will also be interpreted for clues as to how much committee members believe the growth-orientated policies will boost inflation.

Because the Fed largely reacts to the state of the economy, it's hard to speculate about the future.

"The stock market is trading above lagging earnings, which is a signal that the market expects earnings to stay steady or to go up", DeYoung said.

"The Fed is a happy camper", said Thomas Costerg, senior USA economist at Standard Chartered Bank.

"If you add those to current projections then you have got an argument for higher rates in the U.S.", he said. "The other thing is global growth. So, if their growth were to falter, then the prospects are not as strong".

Much of the world borrows money in dollars or seeks to lend to the USA government and United States corporations in dollars.

"Though the administration's policies are likely to be a net positive to the economy, there is a risk that trade protectionism and the curtailment of immigration lead to a weaker economy", he said. "What policies are set beyond 2017 depends on the strength of the economy".


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