Fantastic Fed’s Neutral Scamander

US Federal Reserve says neutral rate close

Image source: federalreserve - flickr

What's going on?

Stock markets around the world rose on Thursday, largely thanks to comments from the chair of the US Federal Reserve that hinted at slowing interest rate rises.

What does this mean?

The US central bank has been raising interest rates for a while to make sure that strong economic growth doesn’t get out of control. But it now looks like interest rates will hit “neutral” sooner than previously thought (tweet this). That neutral rate is the one which keeps the economy ticking along nicely, holding inflation – the rate at which prices increase – steady without threatening to overly stymie growth.

Why should I care?

For markets: Markets are on the up.

The chair’s comments were music to the ear of markets. If interest rates are “just below” neutral, it’s likely future rises beyond that widely tipped for December will be fewer and further between. That means US companies (and individuals) won’t face much higher interest payments on their borrowings, and are instead more likely to invest in their businesses and buy stuff, because leaving money in the bank won’t pay as much interest, either. Slowing rate rises are good news for economies around the world, too: many countries (especially emerging markets) use US interest rates as a benchmark, and companies there can also look forward to less costly debt and subsequently greater profit. Investors love more profit – and so they bought up companies’ stocks on Thursday.



For you personally: Back on the housing hunt.

Data out on Wednesday showed an unexpected drop in US new home sales in October. The rapid rise in interest rates this year might’ve been giving people cold feet about buying a new house (demand was stoked by previous low interest rates, which made mortgages cheap). But if rates aren’t rising as fast any more, then people may soon start splashing the cash again – including on property.

Originally posted as part of the Finimize daily email.

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