A Fed rate hike can mean a number of things for investors, both positive and negative. The hike makes borrowing more expensive, slows the economy, and affects the stock market. But what exactly is a rate hike? Let’s examine these questions in more detail. What are the consequences of an increase in interest rates? And what should investors do if they don’t like the news? What can they do to mitigate the negative impact of an increase?
Interest rates are at a long-run level
Despite the recent hike in interest rates, the Federal Reserve remains cautious about the future. The Fed wants to raise rates rapidly to stabilize the economy and protect jobs, but it also doesn’t want to overheat the economy or erode the value of the dollar. At the meeting, the Fed’s Open Market Committee approved a rate hike of 25 basis points. There are three more hikes planned this year.
They make borrowing more expensive
While rising interest rates are usually bad news for borrowers, they can also be a boon to savers. Since more banks rely on consumer deposits to fund loans, they raise their yields to attract additional cash. Unfortunately, yields don’t typically increase as quickly as the Fed interest rate, and traditional brick-and-mortar banks hardly need deposits these days. In the last year, the average savings yield has only risen 0.05 percentage points, from 0.06 percent to 0.11 percent in the week ending July 20.
They slow the economy
If the Fed is raising interest rates, the effect may be to slow the economy. While rising energy prices and stock market volatility have some implications for the U.S. economy, the overall slowdown is not likely to cause a recession. Moreover, the economy does not show signs of significant inflation, so any cuts to interest rates won’t affect the price level or the wages of American workers. Besides, Fed policy won’t harm the economy in the long run.
They affect stocks
The recent reports of consumer inflation and the upcoming quarterly data from the Federal Reserve will be key factors for investors to watch. Last week’s report dashed hopes that the inflation rate had already reached a peak. Other news that may affect markets is the ongoing war in Ukraine and the COVID outbreak in China, which is disrupting supply chains and causing factory closures. In addition to all of this, the upcoming report will provide insight into whether the Fed will raise interest rates further.
They affect mortgage rates
Although the Federal Reserve doesn’t set mortgage rates, its decisions are closely watched by key players in the mortgage industry. Their actions affect mortgage rates indirectly, as they increase the cost of funds for lenders. Many lenders have already factored in increases in inflation to their cost of funds, and mortgage rates tend to move in response to upcoming increases in these costs. The following are some factors to keep an eye on. – Fed Rate Hike and Mortgage Rates love Sosa lyrics