Moderating Economy or Downturn Preparation?

While economists and financial experts seem to be in basic agreement about the projected number of rate hikes we should be expecting, there appears to be two schools of thought as to the Fed’s reasoning for hiking interest rates. A recent Reuters poll surveyed 103 economic experts. When asked what factors contributed to federal rate hikes, 40 percent said they believed it was to cap future inflation, while nearly a third believed the Fed is padding for a market downturn.

What Federal Rate Hikes Mean for You

Most experts agree on projections that the Fed will bump the current rate by 25 basis points, raising the current percentage from 1.25 to 1.50 percent. At the current pace, federal interest rate hikes wouldn’t hamper economic growth. There’s still room to grow and we’re still a comfortable distance from pre-recession levels. If you’re wondering how the expected rate hikes are going to be affecting your day-to-day, you probably won’t see too much change. As with any interest rate hike, savers benefit from increased higher interest rate returns,while spenders will find themselves paying higher rates on credit cards and loans.

The Federal Reserve recently announced that interest rate hikes likely, causing trading and investing to slow. Fed Chairwoman, Janet Yellen will most likely announce increases later this week, with several more expected throughout 2017. Rates will likely increase 0.75-1.00 percent, initially, according to a Reuters report. The Fed’s announcement considerably slowed the recent tech and industrial market rally Wall Street has been experiencing. Investors and securities traders are waiting to see how these increased rates will affect market holdings.

What’s the hype on the hike?

Fed Chairwoman, Janet Yellen, has been hinting that rate hikes should be expected for 2017. Economists use current and projected job growth as well as U.S. economic strength as determining factors in determining interest rate hikes. Recent reports on the U.S. Labor market indicate that the economy is able to sustain a series of interest rate hikes. Generally interest rate hikes correlate with a strengthening U.S. dollar.

Cause for concern?

While interest rate hikes typically indicate a strengthening economy, domestic and global political issues along with economic concerns at home and abroad have caused investors and trading experts to watch closely for the expected rate hike announcement. Despite a record-reaching post-election market rally, optimism has waned on Wall Street. Although traders and broker-dealers expressed excitement for expected deregulation under the Trump Administration, excitement has turned to anxiety under lack of policy detail. Also, despite a strengthening dollar, Reuters reports that gold prices have surged under uncertainty over European markets.

Investor Resources

Don’t let market wariness be an intimidater. The best thing you can do as an investor is be prepared. Savage Villoch, PLLC is here to serve our investor clients. If you have questions or concerns about how an expected rate hike will come into effect or want to learn more about protecting your investments, contact us today.

The Federal Reserve has decided to leave interest rates alone for the foreseeable future, according to a report from Reuters. Despite the fact that a target rate-hike was announced last December, the Fed has deferred any increases as part of a long-term plan to reignite the U.S. economy. President of the Minneapolis Federal Reserve, Neel Kashkari, stated that “the U.S. economy has room to grow before it overheats”. Economists have been speculating when the Fed will introduce a new rate increase as recent figures show the economy on a steady, upward growth. National unemployment is currently at 4.9 percent, which many economists agree is a sign of a stabilized economy. They also say that soft inflation rates are beginning to show signs of hardening. The Fed plans to keep interest rates unchanged as a cushion against a possible slowing global economy and in the event of any destabilizing events in the global market.

Aren’t low interest rates a good thing?

Yes and no. Low interest rates encourage consumers to borrow and invest back into the economy. They also insulate an economy against unforeseen financial events. Low interest rates make investing safer, but they limit returns on investments due to such a low annual accumulation of interest. Long-term investments, like bonds, bear incredibly low yields. Low interest rates also push up inflation rates, or the cost of goods and services.

Further Economic Cushioning

On a related note, Reuters reports that Federal Reserve Chair Janet Yellen announced this week that the Fed is considering a change to their annual stress tests, or how the overall economy and U.S. securities will fare in the event of a global financial crisis. Without going into specific commentary on the state of the U.S. economy, the Fed char described a more “risk-sensitive, firm-specific buffer”.