The Federal Reserve or "the Fed", plays a pivotal role in the global markets. For if it were not true, then most investors around the world wouldn't be worried whether or not the US base interest rate is raised before the end of the year.
In the recent Federal Reserve committee meeting held last week, it became clear that interest rates could still go up before the end of the year despite the committee voting on the rates to remain unchanged for the time being. Analysts and investors are still worried about an interest rate hike, come December.
What does this mean?
In most cases, when the buzz about interest rates hits the headlines, most people think of the impact on financial markets. However, the effects run down to the simple consumer, who pays for a mortgage, or a new college graduate about to buy a first car.
When interest rates rise, it becomes more expensive to borrow money, and therefore, you end up paying more for your mortgage and car loans. Conversely, when interest rates are low, the threat of inflation arises while questions begin to float around in the direction of economic health of a nation.
For now, I am more interested in what we should look forward to, regarding the current situation of US interest rates and the impending rate hike later this year.
In the wake of Federal Reserve voting against raising interest rates, US stocks rallied across the board with the Dow Jones Industrial Average, Nasdaq Composite Index and S&P 500 all recording gains.
NASDAQ gained 53.83 points to close at 5295.18 on the day, whereas S&P 500 saw a rise of 23.36 points to close at 2163.12. On the other hand, the Dow gained 163.74 points to close at 18293.70. This shows that the news that interest rates were going to remain unchanged for the time being triggered a positive reaction from investors.
However, analysts who prefer to scrutinize information further, could also argue that the fact that the committee did not completely rule out raising interest rates this year, means the economy is still in a position of strength, even with the upcoming presidential election. The anticipation of another interest rate hike seems to fuel demand in the market more than the actual increase in the base interest rate.
For instance, towards the end of last year, US stocks rallied to record highs with the Dow, NASDAQ Composite and the S&P 500 leading by example.
However, at the beginning of 2016 after the rate hike, stocks seemed to cave in as the market underwent what investors believed to be a major correction. It wasn't until late February that stocks peaked again as the Federal Reserve began to shower the market with positive information on another rate hike.
So, what if Fed raises interest rates in December?
Most investors and traders anticipated that the Federal Reserve would not increase interest rates this month. Now, with the elections on the way, the next realistic time to raise interest rates would be December. The Federal Reserve Committee will meet again in November, but it is unlikely that interest rates would be raised in an election month. As such, December is now the time to look forward to.
On the other sides of the Atlantic and the Pacific Oceans, European and Asian countries are trying to keep their interest rates checked at lower levels due to economic uncertainties. High interest rates are never good for any ailing economy, which suggests that while the US appears to be in the clear to tweak its base interest rate, most of the other developed countries are still struggling economically. Central banks in Europe are continuing to push the rates down, whereas Japan leans towards negative rates.
The US has proven that despite the unimpressive status of other top global economies, it can still improve independently, which means that if interest rates were to go up again, then it could be possible to cope with the ripple effect from the slowing global economies.
Stocks have already rallied significantly this year, which means that another major rally post-the rate hike is unlikely. Nonetheless, this year it won't be just about the rake hike. The US economy will be readying itself for another leader early next year, and who knows the policies that the next POTUS will bring to the table before the congress?
Conclusion
In summary, sometimes stocks do well when interest rates are low, and there is some positivity from within the corridors of the Federal Reserve with regard to economic status and the potential for a rate hike. However, if the Fed were to increase rates and then the economy fails to respond accordingly, then it could hurt the markets, as seen following the last rate hike in Dec. 2015.
This ultimately means that investors should look more towards stability, rather than another market rally, should the Fed choose to play that card. On the flipside, failure to raise interest rates this year could raise concerns over the US economic status.
