Fed rate hike wrong move for emerging economies

Most probably the Federal Reserve will increase the benchmark short term interest rate this week.

Franklin Templeton’s star bond investor Michael Hasenstab said recently that higher USA rates would magnify differences between emerging market economies in 2016, although he said concerns about a “systemic crisis” were exaggerated.

The rise would mark “the end of a very big illusion”, says Christine Rifflart, economist with French think tank OFCE.

Generally, sales of durable goods decline when interest rates go up because of the effect they have on revolving credit instruments. “I don’t expect to see any impact”.

The October and November US employment reports bolstered confidence in the trajectory of the economy, with the jobless rate down to 5%.

Others are calling for a more conservative approach, warning that the USA policy change could evoke a new and perilous mix of global economic uncertainties coupled with recent swings in oil prices and a slowdown in China.

The average interest rate on a typical 30-year fixed rate mortgage is 3.9 percent right now. Going forward, progressive rate hikes could mean that more lower- and middle-income borrowers take out longer loans, which in some cases might last longer than the life of the auto.

There are a number of reasons why the dollar could fall after the Fed hikes even though USA rates will move higher at a time when many other major central banks have taken steps to drive their rates lower.

The Fed’s Open Market Committee, which sets monetary policy, slashed the benchmark rate to near zero seven years ago as the financial crisis plunged the U.S. and global economies deep into recession.

The best we can glean from these two surveys is that while investors look defensive for the period immediately after the Fed does its thing, they are prepared to give higher rates a bit of time to bed down.

“They don’t want to risk anything”, said Ozlem Yaylaci, a senior economist with IHS Global Insight in Lexington.

Traders said many investors have already positioned their portfolios in anticipation of the widely expected move, and will instead be focusing on comments from Fed officials about the pace of future rate hikes, which is expected to be gradual.

For now, the Fed’s preferred inflation gauge has risen a scant 0.2 percent over the past 12 months.

McBride said savers should shop for the highest rates they can find. That 0.00% to 0.25% has been in place since December of 2008. Yaylaci forecasts that rates will peak at 3.25 percent in late 2018 and remain there into 2020. If the Fed goes a little too far in raising rates, it could really slow the economy. If the USA economic expansion continues, job creation should follow and we should expect to see interest rates return to more normalized levels. “The fed funds rate is tied to what the prime rate does and that’s about three percentage points above the fed funds rate and that links to credit cards”, Conway said. After the past two meetings, Richmond Fed President Jeffrey Lacker dissented because he felt that the Fed should have raised rates. “The only surprise is the Fed coming across more hawkish than expected, but that’s a modest possibility because the Fed is going to be very careful with its guidance”. Investors would evaluate their positions as the United States prepares for a rate hike. “But I think over time, competition for depositors’ funds will force the banks to offer more”.

The Fed and the market face significant challenges as rates rise, but the good news is that the Fed should have sufficient tools to raise rates and maintain credibility even with a large balance sheet. Now, with the job market all but fully healthy, the central bank is ready to begin lifting rates toward normal levels.