Fed Rate Hike: Effect on You and Your Investment

Synopsis:
This article examines the effects of the Federal Reserve's recent 25 basis point rate hike, illustrating its impact on various investment products, including bonds, stocks, real estate, and currencies, as well as personal finance aspects like mortgages and savings.

The Fed decision was out recently of an increase in rate by 25 basis points. The Fed resumed its most aggressive hiking campaign in four decades, raising interest rates from 5.25% to 5.5%.

A Challenging Economic Outlook for the Rest of 2023

Fed economists anticipate a diffcult second half of the year for the U.S. economy. In June, Fed offcials projected a median fed funds rate of 5.6% in 2023 and indicated the FOMC will not pivot from rate hikes to rate cuts until 2024.

Despite persistent inflation and rising interest rates, investors have piled into stocks and other risk assets in 2023 as concerns over a hard landing for the U.S. economy have dissipated. The S&P 500 is up 18.9% in 2023 and is only about 5.2% below its all-time high of around 4,800.

The stock market’s 2023 rally has endured despite a sharp decline in S&P 500 earnings growth. In fact, analysts are projecting full-year S&P 500 earnings growth of just a little percentage in 2023.

Is the Fed done with Rate Hikes?

"It is certainly possible we would raise the funds rate at the September meeting if the data warranted, and I would also say it's possible that we would choose to hold steady at that meeting" if that's what the data called for.'', said Fed Chair Powell.

Powell highlighted that Fed staff are no longer forecasting a US recession, and said that "we do have a shot" for inflation to return to target without high job losses.

Stocks Response to Fed Rate Hikes

While policymakers indicated at the June meeting that two rate hikes are coming this year, markets are pricing in a better-than-even chance that there won’t be any more moves this year.

Over time, higher costs and less business could mean lower revenues and earnings for public firms, potentially impacting their growth rate and stock values.More immediate is the impact Fed rate increases have on market psychology or how investors feel about market conditions. When the FOMC announces a rate hike, traders might quickly sell off stocks and move into more defensive investments without waiting for the long, complicated process of higher interest rates to work through the entire economy.

How does this decision impact you personally?

Home Loan and Mortgages:

The Federal Reserve doesn't set mortgage rates, but its actions indirectly affect mortgage rates. Mortgage rates have risen less, with the average interest rate for a 30-year fixed-rate mortgage going from around 3.2% in early January 2022 to around 6.8% in mid-July 2023.

Mortgage rates are influenced by many elements, including the inflation rate, the pace of job creation, and whether the economy is growing or shrinking. The Federal Reserve's monetary policy is a factor, too, and is set by the Federal Open Market Committee.

Rising rates indirectly impact long-term home loans like a 30-year, fixed-rate mortgage. Banks' rates for a 30-year, fixed-rate mortgage reference the yield on 10-year Treasury bonds. Typically the 10-year yield is more directly influenced by Fed rate policy, although the Fed funds rate is only one factor among many that feed into 10-year yields.

Credit Cards Become More Expensive:

Credit card debt becomes more expensive when the Fed raises interest rates. That’s because the interest rates charged by credit card companies tend to move in lockstep with the federal funds rate. This key interest rate impacts how much commercial banks charge each other for short-term loans.

A higher fed funds rate means more expensive borrowing costs, which can reduce demand among banks and other financial institutions to borrow money.

Generally, inflation is higher than the top savings yield. But there are some exceptions, such as right now.

How does the hike affect different investment products?

With Bonds, it depends: Bonds are susceptible to interest rate changes. When the Fed increases rates, the market prices of existing bonds immediately decline. That’s because new bonds will soon come onto the market offering investors higher interest rate payments.

While not guaranteed, Gold often has an inverse relationship with interest rates. The price of gold will usually decrease when interest rates rise. Other factors beyond rates—such as the supply and demand dynamics seen in most commodities markets—are likely to have a more significant impact on the long-term performance of gol

An interest rate hike by the US Federal Reserve could have a bearish impact on crude oil prices. This makes it diffcult for consumers to buy crude. In the past, an increase in interest rates has hurt crude oil, and prices have declined.

When the Federal Reserve increases the federal funds rate, it typically increases interest rates throughout the economy. The higher yields attract investment capital from investors abroad seeking higher returns on bonds and interest-rate products.

Global investors sell their investments in their local currencies in exchange for U.S. dollar-denominated investments. The result is a more robust exchange rate favouring the U.S. dollar

To Sum it Up

Here is a common mantra regarding the Fed: Don’t fight it. Most of the time, it means investors should adjust their decisions to fit monetary policy. Keep an emergency fund to stabilise your financial portfolio and maintain the foundation

All we can do is hope that the intent of taming down inflation will succeed in the long run!

Until then, sit back and watch out for further economic events!