Interest Rates Get Fed

25th_September_ (4)

Image source: Madeleine Stuart / Finimize

What's going on?

As expected by 94% of investors, the US Federal Reserve (a.k.a. the Fed) announced another interest rate hike on Wednesday.

What does this mean?

The US economy’s been strong by most accounts – and manufacturing data released on Tuesday suggests it’s continuing to lift heavy. Left unchecked, it’d likely lead to higher inflation (where prices of goods and services rise, thanks to increased demand for them). Higher interest rates help cool this growth by making it a little more rewarding to save money (think: interest from the bank) and more expensive to borrow money and spend (think: higher interest payments).

Why should I care?

For markets: The world’s taking note of the US.

When US interest rates move, the world notices – probably because investors choose to move their cash around in response. The latest hike effectively means investors can get paid more than before, from owning new US government bonds – which are essentially risk-free, since the US can choose to print more money to pay back its debts if need be. To some investors, this is a more attractive prospect than buying the bonds of potentially risky emerging markets like Argentina – or shaky developed markets like Italy. And the divergence between the US and some other countries may get bigger: the Fed’s expecting to increase interest rates even further between now and 2020.

For you, personally: Rising rates are bittersweet for homeowners.

If you’re in the US, along with the rise you’ll probably get in interest on your savings, the cost of new loans and variable rate mortgages will increase, too. A risk to homeowners is mortgage payments rising faster than they can keep up with – perhaps forcing them to sell, or risk default. In August, new home buying in the US exceeded expectations, perhaps as would-be homeowners tried to lock in more favorable fixed mortgage rates (which don’t move with interest rate changes).

Originally posted as part of the Finimize daily email.

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