The Suspense Is Over!
For the first time in a decade the US Federal Reserve raised interest rates in what was a pretty expected decision but nevertheless the stock market reacted with US stocks up almost 1.5%. So, what does this mean for us and the US economy in general?
For one, the US economy is in great shape which is what sparked the decision to raise interest rates in the first place
Unemployment is now at 5%, which is down from 10% in 2009, and the economy is now growing consistently above 2% per year
Low interest rates spur economic growth because it becomes a lot cheaper for people to borrow money and do things like buy houses etc that they may not have been able to do otherwise. However, when interest rates are too low then we could see a case of over-borrowing and this would have side effects such as increasing property prices etc.
By raising the interest rates slightly now, the US federal reserve is mitigating any risk of over-borrowing, at a time where they think such a move is sustainable by the economy. What surprised me was the way the markets reacted to this news. Usually when interest rates rise its bad news for stocks and bond but in this case the US stocks were up almost 1.5%
The way I see it is that since the increase was so gradual it did not have a substantial impact on stocks and bonds. Future increases will be interesting but the Federal Reserve has already stated that any increases will be gradual and as long as this is the case I think the markets should be able to sustain.
Banks did not hesitate to increase their prime rates and acted on the news almost immediately. On an individual level this means that loans such as mortgages will cost more per month and there will probably be a decline in money being borrowed for the coming year.
However, what does all this mean for the commodities markets? With interest rates increasing, people are surely going to want to hold assets that pay an interest and commodities such as gold do not. Do you guys see a sell-off coming? what other implications do you think this increase will have?
Stocks didn't go up 1.5% lol.
they did indeed. have a read
http://www.ft.com/intl/cms/s/0/7974af20-a3a3-11e5-8d70-42b68cfae6e4.htm…
oh I thought you meant to date they have. Because since the market opened on Thursday Dow went down 638 points.
It's nothing more than people feeling like they have to do something. No one knows what will happen, this is evident by what the markets have done since the announcement. The markets rocketed upwards immediately following the announcement then came crashing back down.
The idea that the FEDs balance sheet is too large is just people feeling like they need to have an opinion about the issue. When it comes down to it the USA has the most powerful military in the world not to ensure peace but to ensure that the USD is the world reserve currency. We can borrow with impunity because we can bully anyone who complains about it.
"When it comes down to it the USA has the most powerful military in the world not to ensure peace but to ensure that the USD is the world reserve currency. We can borrow with impunity because we can bully anyone who complains about it."
I like this. Gave me an a-ha moment
The economy is in great shape? Seriously?!
Yellen has waited far too long, credit growth has reached historical peaks, household savings rate has remained unchanged despite all this money sloshing around, there's a huge bubble in corporate debt. etc. etc.
I'd be very careful making sweeping statements. Very few Chief Economists are bulls right now.
DickFuld What are your thoughts on the raised rates and affect it will have on us? The better the response the bigger drink I will serve you!
that's unfortunate because it's about to be a bear market
Credit markets singing a different tune. Will be interesting to see how it unfolds. Very real possibility Fed hiked rates as industrial production enters recession and expansion cycle nearing/at top.
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