Higher US Interest Rates Ahead
The Federal Reserve said that the possibility of raising US interest rate has “strengthened”
Janet Yellen, the Chair of the Board of Governors of the Federal Reserve System, announced that modest economic growth and a low unemployment rate means that the chance of a rising interest rate has increased. The exact time of the rise in the interest rate has yet to be confirmed but some economist said that they expect this could happen as soon next month or in December.
The Fed raised the key policy rate at the end of last year, but has postponed to increase the interest rate again this summer due to uncertainty from the UK Referendum and constantly low inflation.
The Pros of Rising Interest Rates
Rising overnight target interest rates means that other interest rates are also rising e.g. the interest rate on deposit. This is good news for savers since it means they will earn more interest on their deposits.
The underlying reason why the Fed wants to increase the interest rate is because they want to make sure they have enough space to lower the interest rate in case there will be another major recession like the one in 2008.
The Cons of Rising Interest Rates
Interest Rate hikes means that the cost of borrowing goes up e.g. mortgages and car loans. Consumers will also see higher interest rates on credit cards.
In addition, an increase in interest rates would appreciate USD to other currencies. This is a bad news for other countries which borrow from the US since they will need more money to pay off their debts.
How did the market respond?
The market showed a mix feeling after Yellen gave the expectation on rising interest rates on Aug 23, 2016. The stock market was up at one point but ended lower than the previous day.
Are all major central banks around the world thinking of raising interest rates?
Many countries in Asia, Africa and Latin America tend to loose their monetary policy by using the program of quantitative easing. This action is taken to help the economic recovery and prevent investors putting their money abroad. In fact, some central banks (Eurozone, Denmark, Sweden, Switzerland and Japan) have decided to have a negative rate on the commercial banks’ excess funds held as deposit at the central bank. The negative interest rates look ridiculous since we are losing our money while our main purpose to save money in the bank is to earn the positive interest rate on our deposit. The below zero rate, however, is acceptable since they don’t have any other place to park their extra money. The rock bottom interest rate is one of the major reason why real estate prices are increasing rapidly, but this is another story.
What’s next?
Forecasting is tricky. Before the UK referendum, the Fed announced that they would increase the interest rate but they did not. Everyone is watching the market closely. Gradual increase in interest rate is expected by the Fed and it seems that a negative interest rate is not on their table for now.
