U.S. interest rate rise signals end of ultra-low borrowing costs

The hike directly increases the cost of borrowing money.

The quarter point rate hike by the US Federal Reserve this morning is not expected to have an impact on New Zealand home mortgage rates, an economist says.

Economist Andrew Charlton from AlphaBeta told Radio National this morning that the level of the rate increase and the Fed’s outlook for the year fell short of what some market watchers had expected.

These rates have gone up from 3.75 per cent to 4 per cent, tracking the Fed.

The Dow Jones Industrial Average finished the session off slightly, while the S&P 500 and Nasdaq closed in marginal positive territory.

“They do not have as much room to be patient as they did before”, said Tim Duy, an economics professor at the University of OR, who expects Fed policymakers to lift their rate forecasts this week.

The impact on mortgage rates is more nuanced. One rate-setter – Neel Kashkari of the Minneapolis Fed – dissented from the vote for a rise, arguing in favour of unchanged rates.

Dachrahn Wu (吳大任), director of National Central University’s Research Center for Taiwan Economic Development, said that Taiwan’s economic recovery has just kicked off, with momentum in exports, which account for about 60 percent of the country’s gross domestic product (GDP), starting to pick up in the second half of past year.

“This rate rise was well telegraphed by the Federal Reserve and so fully priced in to markets”, he said. “We agree with the Fed’s signaling to allow inflation to run hot in order to achieve a sustained 2% target-yet anticipate another hike in June”. Credit card rates will rise in lock step along with the Fed rate increase.

In December, the Fed penciled in three quarter-percentage-point increases for 2017 and held to that pace, according to its so-called dot plot of projections for future rate hikes by Fed members. Inflation is now near the 2% annual pace that the Fed regards as optimal. Yellen will probably still be on the Fed board, and she’ll do her best to obstruct rate cuts because such a move will discredit her policies.

The Fed credited several factors in the economy for its decision to increase the rate and said the current status of the economy appears “roughly balanced”.

“The Fed wasn’t dovish per se, but with near record short speculative positioning in the USA interest rate futures markets, and an expectation that if the Fed was going to do anything today with the “dots” it would be to ratchet three up to four for either this year or next, markets really only had one way to react”, said Ray Attrill, head of FX strategy at National Australia Bank.

Wall Street ended with solid gains on Wednesday after Fed Chair Janet Yellen expressed confidence in the USA economy and said high stock prices were a signal of easier financial conditions. Here are some tips to help you make the most of rising interest rates.

Here’s another stock idea to consider. “This could lead to bear steepening in the front end of the curve (two to five year) with two-year bond yields rising a bit less than five-year”. Soon electric vehicles (EVs) may be cheaper than gas guzzlers.

Oil prices have also moved higher, with the price of Brent crude oil [LC0c1] up about 30 percent from January 2016.

It’s not the one you think.