The Impact of Federal Interest Rate Hike
Federal Interest Rate
The Federal Interest Rate
has just suffered a third-time increase this year. What occurs in the past year with the federal interest rate is that the Federal Reserve has raised its benchmark interest rates to the range between 2.00%-2.25%. This happens to be the seventh time the Feds are raising rates in three years. This, the Feds have done in compliance with America’s post-crisis stimulus campaign.
By increasing the federal interest rate by 25 basis points, the Federal Bank sets the stage for more capital required to make purchases and higher costs of business expansion and payroll funding.
Here, we shall look at how the rise in interest rates will affect borrowing by consumers who may want to obtain credit based on the performance of the US dollar.
Increased prime rate
When the Federal bank increases its interest rates, the prime rate increases. Because the basis of other forms of consumer credit is the prime rate, the effect of this is that banks have increased their fixed and variable cost of borrowing when assessing the risk in less credit-worthy consumers.
The credit card rates
With this increase, banks will determine the credit-worthiness of consumers based on their risk profiles. As a result, this will affect the rates for credit and other loans as these require extensive risk profiling for consumers seeking to make purchases. The overall effect will then be higher interest rates for short-term lending than for long-term loans.
How the Federal Interest Rate impacts Savings
While this theoretically implies consumers may head to banks to make deposits to obtain higher interest rates, it essentially means that everyone with a debt burden in their credit cards or even home loan will seek to clear these first to offset the variable rates tied to the credit cards and other loans.
US National debt
Some view a higher federal interest rate will add on to the national debt. In fact, the US government may end up paying $2.9 trillion more in debt than if its interest rates were near zero- report. The report compiled by the Congressional Budget office and Dean Baker in 2015 seems to have foreseen the current market situation.
One of the few industries that have immensely benefitted from the Feds announcement is the auto industry with a zero interest rates policy. However, with the increased benchmark rates, there may be some increment in the near future. Interestingly, the auto loans being long-term will experience lower interest rates.
Goldman Sachs suggests that higher interest rates only serve the interests of banks. That when interests rates go up, the banks reap more while the rest of the business sector experiences a slump in profitability. This is major because the cost of expansion goes up. And for a market currently in earning recession, this may be terrible news as it may lead to massive job cuts.
Higher home sales
A higher federal interest rate usually acts as a deterrent to home purchases. For example, a Fannie Mae-backed home loan at 4.65% within a 30-year period will translate to about 60% in interest. The high rates are seen as a stumbling block on the path to achieving the American dream of homeownership.
Performing stocks despite high-interest rates
Companies with multinational operations are experiencing this pinch. The local companies are having a great time due to the strength of the dollar locally. At one point, multinationals Caterpillar, Hershey and Microsoft warned against the high-interest rates on their profitability.
The higher interest rates often deal a major blow to the US companies having a multinational presence. The Feds began the monetary policy normalization measures in 2015. Each year comes with its fair share of challenges on the one hand and opportunities on the other.
Most of the consumers are hit hard by the increase in interest rates after 8 years of near-zero %. The banking sectors and the auto industry are having a great time.
According to the Feds, an average of 192,000 jobs a month has been added. The unemployment rates are on its lowest, only comparable to that in the year 2000. The Feds labor market has been on the rise since the financial crisis ended. They project the country to be on a growth trajectory, saying an inflation rate of 2% will be healthy.