What an interest rate hike could mean for you

After years of waiting, it’s finally here.

If, as is widely assumed, the Federal Reserve approves the first interest rate hike in almost a decade at their December meeting this week, all the focus will move instantly away from the timing of the initial hike and toward the trajectory of future rate hikes.

The Fed has kept its benchmark short-term rate near zero since setting it there in 2008 to help save the financial system in the depths of the financial crisis.

For another, “Nobody believes the Fed will move up rates very quickly”, said University of Georgia economist Jeff Humphreys.

The interest rate the Fed tries to shift-the “federal funds rate”-is the rate banks charge each other for overnight loans”. The steepening yield curve would likely cause the Fed to hike rates faster in tried and tested fashion rather than accelerate Treasury sales.

A wrong call on inflation now could stunt job growth and possibly keep rates stuck near zero or even force the Fed to reverse course and cut rates. Reducing interest rates is a primary tool when the economy slows.

But the economy has to cooperate. Many economists predicted a spiral of falling prices when the USA jobless rate soared during the crisis and then thought inflation would rise when unemployment plunged.

Stock market: With the benchmark rate so low for so long, the market has been the only growth game in town for many investors. At this point, all we can forecast is the first one.

The 22 primary dealers that trade directly with the Fed expect the FOMC to announce Wednesday alongside its policy statement that the cap will be raised to $500 billion, while daily borrowings immediately after liftoff are expected to rise to $300 billion, according to a New York Fed survey ahead of the October FOMC meeting.

Oil producing nations, hit by the price of crude tumbling to seven-year lows, likewise have to deal with the fallout of a USA rates rise and accompanying dollar rise. So buyers have to be aware of what the impact could be down the road.

In this piece, we take up from where in equities article, we concluded that path of USA rate hike more important than the first rate hike and discuss the probable rate hike path.

Your other products will be affected as well. The economy has created an average of 235,000 jobs a month in the past two years, the best performance since 1998-99, even as baby boomers are retiring in droves. What’s the implication for consumer savings here? The corridor’s ceiling will be a measure called Interest on Excess Reserves (IOER), the interest the Fed pays to banks on reserves the banks deposit at the Fed in excess of the required minimum. So the IOER is not a hard floor for interest rates. So the prospect of rates going up is music to the ears of savers.

When the Fed raises rates, expect bank profits to get a boost, allowing them to lend money at higher rates.

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

“While interest rates charged on revolving credit [like credit cards and home equity loans] are pegged to the target Federal funds rate, credit card rates in particular have a large variable spread component”, she writes. And those margins have really been squeezed by low rates. The top-yielding online banks, credit unions and community banks will be those that are more inclined to raise rates. Hawkish means they’re more likely. And that’s the sandbox to be playing in. We have seen the dollar begin to back off of those highs.

Here’s what you need to know about how the Fed’s action will affect you.

To be sure, the economy – both in the USA and overseas – faces a series of headwinds from weakening growth in China to the collapse in oil prices that is hammering American oil and gas producers in energy-rich parts of the country. They’ll do that whether interest rates are 4 percent or 4.5 percent. “They should actually raise and get it out of the way so that everybody can get on with life”.

I think it’s pretty clear that the two rates do not move together.