The Fed is widely expected to raise rate by a quarter point, and is likely to sound more upbeat about the economy.
What the Fed says in its statement Wednesday assessing the health of the economy will be parsed for clues to its thinking about the pace of future rate increases. There is not much for an investor to buy at a good value right now. But with the Fed sticking to its rate hike schedule, Bank of America turned negative while Goldman Sachs and JPMorgan Chase pared gains on the stock market today.
American savers have struggled for years, earning next to nothing at the bank.
But don’t expect the banks to suddenly pay higher interest on your savings account. With interest rates rising, banks will be more likely to green light loans to small businesses as they can start to charge a sufficient interest rate to make the higher risk worthwhile.
The next move came a year later and now we have rate rise number three.
“The Fed is really just normalizing rates now and not tightening credit”, said David Jones, chief economist at DMJ Advisors.
Federal Reserve policymakers expect to hike rates a total of three times this year, including the increase announced Wednesday. But that didn’t happen: It only raised rates once. The unemployment rate was little changed at 4.7 per cent.
Things like mortgages and credit cards rates then get benchmarked off the prime rate. The suspense now surrounds this question: Will they forecast even faster hikes this year and in 2018? “The more important question is: How many more hikes they will give us for the balance of the year?”
The Labor Department said employers added 235,000 jobs in February, well above analysts’ expectations and the average monthly payroll growth for all of a year ago.
Bond prices tend to rise when interest rates rise. During the last economic expansion – 2001 to 2007 – mortgage rates hovered between 5% and 7%. The higher rates will also help to improve small business access to capital. All those can factors can pinch profits. While the Trump administration’s promises to cut corporate taxes, reduce regulations and increase infrastructure spending have contributed to the stock market’s highs and heightened consumer confidence recently, other assurances in regards to halting federal hiring, reducing immigration levels and implementing increasingly protectionist trade policies could possibly offset growth. And just about everyone – 95% of investors – believes a rate hike is coming Wednesday, so it won’t be a shocker.
Fed officials responded to these signs by only ticking up their forecast for core inflation to a 1.9% annual rate this year from 1.8% in the prior forecast. Intel’s shares were marginally lower, while shares other USA chipmakers rose slightly.
But some economists argue that weak wages and productivity growth in the USA will limit he Fed’s rate increases to a handful before reaching a peak at around 2%.
Central bank policy in the U.S. has by contrast gone a lot further on the road towards what might be called normal.
Both sides are certainly looking at different crystal balls. And so, there’s now over $2 trillion in excess reserves parked at the Fed; there was less than $500 billion in 2008. Any growth above that level “can lead to higher inflation that, in turn can force the Fed to raise rates more quickly, a course that often ends in recession”. That could cool spenders’ appetite. The reality however, may be tempered by the still-moderate economic activity at home and fiscal unknowns around the globe.