Federal Funds Rate increased to a range of 0.25% to 0.50%
The Federal Reserve finally increased the interest rate by 0.25% after 7 years of essentially being at 0%. It was the talk of the financial news world yesterday. Is this good or bad? Well, that depends on who you are. 🙂
The winners are people who hold the U.S. dollar. For example if you have U.S. investments in $USD, then you are in a good position. Anyone who makes money in U.S. dollars will also get a boost in purchasing power. These lucky folks include Canadian exporters, and other Canadians companies that do business in the U.S. such as TransCanada, which rallied 15% this week. 😀 American based banks also benefit from the rate hike since it gives them an excuse to increase their prime lending rates, which means they can charge consumers more for mortgages and car loans. Not surprisingly bank stocks such as Goldman Sachs and JP Morgan were up over 2% after the news yesterday. 😉 Major international banks such as Switzerland’s Credit Suisse and Britain’s HSBC also liked the news, both gaining over 2.5% at the day’s close. Canadian banks with U.S. exposure such as Royal Bank and TD also saw some gains, but to a lesser extend. As a whole, stock market investors can celebrate. In the past, equities in developed nations have “reacted pretty well to a Fed tightening,” according to Brian Davidson, markets economist at Capital Economics. Savers and conservative investors, many of who are seniors, can also rejoice as their savings accounts, CDs, government bonds, and money market funds should produce more attractive returns, not immediately, but gradually over the next year or so.
The losers of this Federal funds rate hike, on the other hand, are U.S. borrowers, commodities, U.S. real estate owners, and Canadian consumers. According to the Consumer Financial Protection Bureau, more than 94% of general purpose accounts in their credit card database have variable rates, the average being 12% APR. The quarter rate hike by the Fed will make it harder to service those credit card debts for a lot of U.S. consumers starting from their next billing cycle. Interest has such accrual way of accumulating. 😛 The increased value of the U.S. dollar relative to the Canadian loonie will mean Canadians have to pay more to import goods from south of the border. I don’t know about the rest of the country but around my neck of the woods we important most of our fruit and vegetables from the U.S. I’m expecting higher grocery cost in 2016. Prices of commodities such as oil, copper, and other resources will fall because they are valued in $USD, so a stronger greenback means they become more expensive to most buyers around the world.
But overall, 0.25% is a really small amount and I wouldn’t overthink it. Due to my asset allocation I believe the rate hike will benefit me, but I’m not expecting any major impact this will have on my finances. I’m just going to continue going about my life as usual. 🙂 The Fed’s move will not affect Canada’s monetary policy in the short term. In fact, the two country’s central banks are on very different tracks. The Bank of Canada’s key lending rate stands at 0.50%, and is not likely to go up any time soon given how we were in a technical recession earlier this year. But analysts expect the U.S. Fed to continue raising rates next year. I guess you can say the two banks with different policies have a conflict of interest. ? Although the Fed’s rate hike is positive for the U.S. dollar, it may not be good for the overall economy. It’s been almost a decade since the last Federal funds rate hike in 2006, so it will be interesting to see how everyone reacts now. We’ll have to wait a few months for the effects of this historic event to play itself out.
Speaking of historic events, is anyone else excited for Star Wars: The Force Awakens coming out this Friday? 😀
If you don’t want any spoilers for the movie then I suggest you stay away from Facebook and other social media sites until you’ve watched it.
The hype is ridiculous. Some fans in Canada are willing to pay $300 for a ticket to watch the movie ?, lol. I’m glad to see such fervent consumer demand. It shows how strong our economy is. My imaginary crystal ball tells me that this film will break box office records this weekend. And then on Monday next week, the movie’s distributor, Disney, will see its stock price soar on the news of the movie’s success! 🙂
But then again, you shouldn’t listen to me because I could be completely wrong. Some experts are saying that $DIS is overpriced and could pull back soon. But who knows, right? As a disclaimer I should point out that I may be slightly biased since my Disney shares have doubled in value since I wrote about purchasing them in 2013. 😀
Random Useless Fact