Fed poised for rate hike; so what does it mean to you?

The Fed slashed interest rates to zero in December 2008 to stimulate the economy and boost the housing market during the depths of the Great Recession.

Barring an unforeseen calamity, the Federal Reserve will raise short-term interest rates this week. That means higher interest rates on mortgages, credit cards and auto loans.

To cut through the noise, investors will have to consider what matters and what really doesn’t when it comes to the first US rate hike in almost a decade.

TODAY checked around to see what the local impact might be with a rise in interest rates. Last week, rates on 30-year fixed-rate home mortgages fluctuated around 3.9 percent, according to Freddie Mac, and rates on 10-year Treasury bonds hovered near 2.2 percent, reports Bloomberg.

But Anthony Chan, chief economist for JPMorgan Chase, said any rate increases consumers see will be “marginal” and “gradual”.

So, to see which presidents the Federal Reserve thought needed the most help, one would need to adjust the actual federal funds rate for inflation and output conditions.

To varying degrees, all that weighs on the USA economy and the Fed.

The cause for worry stems from the increase in dollar loans taken by companies in emerging markets over the last seven years.

In a nutshell, for savers, don’t sit back and wait for those higher interest rates to just land in your lap in the form of a better return on your savings account or CDs.

“Since 1997, Korea’s foreign exchange reserves have increased by more than 14-fold and its emergency response capabilities have shown a significant improvement as well”, it remarked, adding, “When the Fed mentioned the possibility of tapering two years ago, foreign investors withdrew their money mainly from Thailand, Indonesia and the like instead of Korea”.

This week’s action in financial markets and the chatter surrounding it will be focused on one thing only: the Federal Reserve Bank. Right now the Fed has a target range of 0-0.25 percent. That’s down a bit recently, following a terrible week in USA and global markets – terrible, in part, because of an expectation that the Fed will move.

If, as expected, Federal Reserve chairwoman Janet Yellen initiates lift-off on Wednesday, or even if she doesn’t, there will be lots of analysis and chatter, much of it conflicting.

A drawback of raising rates is the impact on the housing market.

If the Fed is wrong on inflation picking up, Mr Krugman wrote in the New York Times, “a rate hike could end the run of good economic news”.

– This interest rate hike is the first of what is likely to be a very shallow path.

In the last three months, the USA economy has continued to strengthen its record of robust employment creation, bringing the 12-month average to about 240,000 jobs a month and taking the unemployment rate down to 5 percent. Capital Economics, a consulting firm, predicts that next year’s “big surprise will be how quickly inflation rebounds”, forcing the Fed to raise interest rates sooner and higher than it now expects.

It has remained so low because the economy has taken a long time to recover.

With the jobless rate at 5 percent, half its 2009 level, Yellen was confident enough to warn lawmakers on December 3 that inflation could rise “significantly” above the Fed’s 2 percent target if rate-setters aren’t ahead of the curve. The act of increasing interest rates often reduces money supply and serves as a drag on GDP growth. It may be recalled that the Indian stock market was also caught up in the internet frenzy of that period and the Sensex too managed a 57 per cent gain then.

“Debtors are going to be the losers”, said Humphreys.

One, the overnight Reverse Repurchase (RRP), is meant to be the lowest rate offered in the economy. “But the long-term outlook is still for United States dollar strength in 2016”.

It’s already been a bad year for many developing nations.

Fed transcripts show that at a Fed policy meeting in September 1996, Yellen, then a Fed board member, said she was “quite willing” to support an increase in rates because her analysis suggested inflation was poised to rise. Should US monetary restraint undermine global growth, this may feed back on US growth – and so a wage-price spiral is less the danger than a self-reinforcing global downturn.