In this article we are going to discuss what the possible effects are after of the Federal Reserve first interest rate hike and why it was needed that the Fed had to increase the interest rate.
Federal Reserve interest rate hike for the first time in 7 years
Yesterday Janet Yellen, the chairwoman of the Federal Reserve announced the first Federal Reserve interest rate hike for the first time in 7 year. The reason why the Federal Reserve had to increase the interest rate was because they thought that US economy can start growing with lesser help of the Federal Reserve. Most of the time when a central bank increased the interest rate its because the inflation rate is too high. A increase in the interest rate should decrease the inflation rate. However in this case it is different. The increase in the interest rate is more a sign to the world that US economy is growing and it is going back to the normal growth.
The Federal Reserve interest rate hike was expected by most traders and investors as the past months the economic data from the US was getting better and better. So the interest increase was unavoidable. The question was what is the pace of the Federal Reserve for increasing of the interest rates will be like? Janet Yellen answered that question yesterday in her speech by saying that the interest rate will be gradual increased. Which basically means that increase of interest rate will be very slowly.
What is the impact of the Federal Reserve interest rate hike on the economy?
Now that the first Federal Reserve interest rate hike is a fact. What will be the effect? The first effect will be the that the borrowing cost will be more expensive. As matter in fact Wells Fargo (one of the US big banks) have announced that they will increased their prime rate from 3,25% to 3,5%. And soon other big banks joined Wells Fargo such as JP Morgan, Bank of America ect. By the actions of these banks business owners and consumers who have variabel interest rate for their loans will have to pay more interest to the bank.
On the anticipation of further Federal Reserve interest rate hike in the future people who have plans for buying their house will no long wait and start to get their mortgage while the interest rate is still low. Brokers and companies that are involved in building and decorating houses will be profiting from this first Federal Reserve interest hike. You can expect a increase in sales for companies such as Home Depot.
What is the impact of the Federal Reserve interest hike on the stock market?
Normally a increase of interest rate is bad news for the stock market in general. But in this case it will be good news for the stock market. The reason for that is that gradual increase of the interest rate. Which means that cheap money is still available for at least year. A increase of 0,25% is not much. And because of the gradual interest increase bonds, obligations will be not attractive enough to invest compared to stocks. If the commodities such as oil stays low and the Federal Reserve increase their rates gradual then consumers will still have a strong spending power. With a strong spending power it will be good for the companies. And the best way to profit from it is by investing or trading in stocks.