Fed poised for rate hike, then what?

In connecting Federal Reserve interest rate policy since the 1950s with inflation and employment conditions, some interesting results materialize.

The driving factors in USA monetary policy are the labour market and inflation – the Fed’s so-called dual mandate.

For one thing, the rate the Fed sets – for short-term lending between banks – doesn’t automatically change consumer or savings rates.

Could mortgage rates follow the same course this time around? They don’t have that at their disposal right now with interest rates near zero percent, so they need to raise interest rates a few times so they have something to work with when we have our next economic slowdown.

Stock market: With the benchmark rate so low for so long, the market has been the only growth game in town for many investors.

Relax, Fed watchers. Take a deep breath.

The consultancy added that the impending rise comes against a largely favourable economic backdrop and has been priced in by traders. “Further, rates on mortgages and auto loans are also driven by market dynamics, i.e. the available supply of and demand for credit”.

“Debtors are going to be the losers”, said Humphreys. “Thus, the Ifo business climate and the Purchasing Managers’ Indices for the euro zone probably fell in December”, said Commerzbank analysts in a note.

Total consumer debt across the nation remains below its 2008 peak of almost $13.9 trillion.

By this time next year, most economists expect the benchmark, called the federal funds rate, to stand at about 1 percent. Measures of credit risk in Europe rose to the highest levels in about two months amid concern investors may face more losses after Third Avenue Management blocked investors from pulling their money out of a U.S. high-yield fund. The former is expected to act as a ceiling on the fed funds rate; the latter a floor. That could also mute the effect of a rate hike.

The rate increase is a big move, to be sure. However, the correlation between the federal funds rate and the 10 year treasury rate is only.73, which is still significant but they’re clearly not tied together.

He has admitted that the floor they will attempt to put underneath market interest rates is “soft”, and the central bank could lose control on occasion. Due to the possibility of a rate hike in the United States, the market in India is jittery.

Most other banks, like the European Central Bank, are moving in the opposite direction and cutting interest rates. They make most of their money by collecting customers’ deposits and loaning that money out at higher interest rates. It may be one of the reasons that the RBI (Reserve Bank of India) did not lower the interest rate in its bimonthly review on December 1, 2015.

When there was heightened speculation about an increase in the USA rate in September, Seoul’s main bourse Kospi showed a 1.8 percent rally from Sept. 1 to 17, while the secondary tech-heavy market Kosdaq slid 2.3 percent.

Some banks will benefit more than others, said Marinac, the expert at FIG Partners. It’s not expected to be a punishingly high difference for many buyers, but for those with lower incomes it might be noticeable. One potential hurdle for higher USA rates was cleared in the weekend as Chinese economic data for November came in better than economists projected. Since the financial crisis, the mechanics of raising interest rates have become a lot harder to wrestle with. These banks provide cash to other financial institutions, who in turn provide the financing for home purchases.

In the coming exit, the Fed hopes to keep the fed funds effective rate – the average for money-market trades – in a range, rather than at a specific level. Savers’ returns on money market and CD accounts will likely begin rising – but slowly. The institution estimated as much as $270 billion could leave the country after the rate hike. The Chinese, with their slow economy, are exporting steel at below cost.