Fed Rate Hike: Impacts on the US citizens and other countries

Speculation for more than a year has now ended with the Federal Open Market Committee deciding to increase Fed Rate from near zero ( 0 to 0.25%) to the range of 0.25% to 0.5%.  Why the Fed Rate has been in news for more than a year? 

The simple answer is that the Fed rate directly impacts the lives of millions of American citizens directly and the citizens of other countries indirectly. The change in Fed Rate affects the savers, bank borrowers, home buyers, investors and other countries in one way or other. 

Fed Rate Hike Impact

Fed rate was maintained at near zero since the financial crisis in 2008 when the economic situation in the US was in bad shape and unemployment was at a very high rate of 10%. The unemployment rate has gradually come down to 5% and inflation is near zero. This makes the committee to believe that the economy of US has strengthened and is progressing well. It expects the unemployment rate to come down further.  The inflation may go up slightly, but is confident of containing well within the accepted target of 2%.

Fed Rate Hike: Impact on the US citizens
  
a.    Borrowing interest  rates to go up
Higher the Fed Rate, higher the borrowing cost. The rate announced at present is nominal, but it is an indication of more hikes in the medium to long term. Thus, the borrowers under categories like car loans, housing loans mortgage loans will end up in paying higher interest rate on their borrowings. To get the same amount of loan, borrowers will have to shell out higher EMI in future. The impact will be more on big ticket borrowers. The immediate impact will be on credit card users. 

b.    Good news for savers 
While, the rate hike is a bad news for the borrowers, it is good news for savers. During the last few years, those who kept funds in savings bank accounts or term deposits earned practically nothing as interest. Many banks have already announced increase in lending rates, but have decided to wait to increase the deposit rates. But as the Fed Rate increases, banks will be forced to increase deposit rates to meet their resources for lending. But it is pertinent to note that the increase in inflation may offset the interest income.

c.    Dollar to strengthen against other currencies
The interest differential between the interest rate in the US and other countries will make the US Dollar stronger. Exporters and world travelers will benefit from this as they need to spend less in dollar terms. But, the importers in US will be adversely affected. 

d.    Anxious moments for investors in stocks and bonds.
The interest rate hike will result in more volatility in stock market. With increase in borrowing cost, the funds that will be available to channelize to stock market will be reduced. Strengthened economy gives scope for more economic activities and more activities in stock price. Similarly, investors in other countries are pulling back from said countries for investment in the US.  But  global factors like falling oil price, slowdown in China and reduction in interest rate by other countries will lead to more volatility in stock  and bond market.  
 

Fed Rate Hike: Impact on other countries

a.    Stocks and stock markets to take hit
US financial institutions and investors have been major players in the stock markets in the emerging markets like India, Brazil etc. As the borrowing cost in the US increases, the amount invested is likely to be withdrawn with negative impact on the stock market of such countries.Because of the lower interest rates, many companies have raised loans in US Dollar. Such companies while repaying have to incur more amount.  

b.    Tourism sector to improve
Because of the strengthened US Dollar, tourists from the US will find other countries more economical. This may lead to more income from US tourists.

c.    Exporters to US to gain more in terms of local currency
The strengthening US dollar is a good news for exporters receiving payments in US Dollar as this will enable them to have more local currency on conversion. But the importers from US will be adversely affected as they need to shell out more. 

d.    Bad news for countries trying to be back in track
The outflow from stock markets and other investments will reduce the foreign reserve of countries and the affected countries will become weaker. Further, many countries are in various stages of economic recovery. They have been resorting to interest reduction to improve the performance of the economy. Such countries may find it difficult to bring their economy back in track.  

The news of rate hike has been in economic domain for more than one year now. Hence almost all countries have already factored in the rate hike. Hence, it may not result in major impact as of now.  But the coming days could be tougher. 

John C S

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Summary
Article Name
Fed Rate Hike: Impacts on the US citizens and other countries
Description
Speculation for more than a year has now ended with the Federal Open Market Committee deciding to increase Fed Rate from near zero ( 0 to 0.25%) to the range of 0.25% to 0.5%. Why the Fed Rate has been in news for more than a year? The simple answer is that the Fed rate directly impacts the lives of millions of American citizens directly and the citizens of other countries indirectly. The change in Fed Rate affects the savers, bank borrowers, home buyers, investors and other countries in one way or other.
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