The Fed Awakens: Wall St. ready as interest rate hike seems certain

As the market attempts to price in a rate increase, investors may soon shift gears to pricing in Federal Reserve guidance on interest rates in 2016.

When the Federal Reserve increases interest rates (which its expected to do starting this week), lending businesses will reap the benefits.

Interviews with the Fed chief’s former colleagues paint a picture of Yellen as a pragmatic economist who is ready to adjust course when necessary, but one who relies on data and economic theory rather than guesswork or hunches. So are auto loans and home loans – even credit cards will have promotional periods with extremely low fixed rates.

Based on past tightening cycles, the USA stock market continued to rise even when the Fed started raising interest rates.

Comments made at the Federal Open Markets Committee’s meeting in October pointed towards a 0.25 per cent increase in its target for the fed funds rate at the mid-December meeting. Liftoff if you must, but after that, it’s critical that you go back to being data-driven. Further, by signalling the hike as a dovish one, she will likely cap the gains in the Dollars.

Here are three areas to follow if the Fed hikes its closely watched rate Wednesday. Because the move is so highly anticipated, what matters more to the market is for the Fed to succeed in communicating clearly and assure the market of a “gradual and cautious” tightening pace. The Fed will also be using new monetary policy tools to make rates budge. The Chinese, with their slow economy, are exporting steel at below cost.

But the economy has to cooperate.

And there’s a larger fear a hike in United States rates could be a huge a shock to emerging economies, some of Britain’s key trading partners, which would in turn hit the UK’s ability to maintain economic growth.

The Bank of England is expected to delay a rise in rates following a string of weak inflation figures. So buyers have to be aware of what the impact could be down the road. The Bureau of Labor Statistics estimates that the real unemployment rate is close to 10 percent.

The last time the Federal Reserve raised the federal funds target rate was in 2006.

Korea’s rising household debt doesn’t seem to have noticeable problems, but it is exposed to the upcoming interest rate hike, said Ding Ding, senior economist of the International Monetary Fund’s Asia and Pacific department, at a Bank of Korea-IMF forum, which was held in central Seoul on Friday. What’s the implication for consumer savings here?

Wake points out that often what people expect determines what they do.

The smart money – in fact, almost all the betting money – is on the Federal Reserve lifting the benchmark interest rate off the floor Wednesday.

“There’s no question rates should be higher”, said Mark Vitner, senior economist for Wells Fargo. But a lot of banks will move even more gradually than the Fed.

As recently as 2008, a one-year CD yielded more than 3 percent, according to Bankrate.com. And those margins have really been squeezed by low rates.

On the other end, the Fed was toughest on Ronald Reagan and Bush I. They apparently didn’t need the Fed’s help.

As for mortgage rates, Conway reiterates that the increase won’t be so sudden, either. “And as long as that’s the case, long-term interest rates will stay down”. And that’s the sandbox to be playing in. “I don’t expect to see any impact”.

At least in the short-term, there’s been concern about the impact [higher rates] might have on housing and auto sales. And that better economy is what ultimately gets people to buy houses. So the IOER is not a hard floor for interest rates. “Fundamentals have improved in several large emerging market economies since the taper tantrum”, say analysts from Bank of America.

“All the bond purchasing that is still going on in places like Europe and Japan will serve to keep USA rates lower”, Jones said.

Asian markets mirrored jitters on Wall Street: The Dow Jones Industrial Average declined 3.26 per cent last week, while the Standard & Poor’s 500 plunged 3.8 per cent in its biggest weekly decline since August.

Auto loans are the same thing.

More than a few things could go wrong. Traders are “thinking about the returns they are going to get over time”.

Millions of Americans will be affected as rates go up. Many are anxious that the Fed’s main weapon has lost its accuracy, or could misfire altogether.