Thumbs Up For An Interest Rate Rise?

Image source:

What's going on?

Last week, officials from the US Federal Reserve (the Fed) made a number of comments. Whats the big deal? Well, the comments suggested the Fed would increase its target interest rate before the end of this year.

What does this mean?

Everybody has their own version of the Super Bowl, and central bankers Super Bowl took the form of a conference in Wyoming late last week (not quite as exciting as the real thing, perhaps). Beyonce didnt play at the half-time show, but Fed Chair Janet Yellen did make a much-anticipated speech. Yellen said the case for an interest rate rise had strengthened. Her speech, combined with some comments from other Fed officials, led investors to ascribe a higher chance of an interest rate increase in the coming months.

Why should I care?

For the markets: The US dollar went up in value after all these speeches and comments.
As the odds of an interest rate rise in a country increase, the value of that countrys currency tends to increase too. Thats because investors like to get paid more interest and so move money to the country that offers a higher interest rate (all else being equal) – you can click here for our fuller explanation. A stronger dollar is good for Americans traveling abroad, but it can pose challenges for US companies (for example, by making their products more expensive for overseas buyers).


The bigger picture: Interest rates affect the value of lots of stuff.
Savers who keep money in bank accounts would see a greater return on their savings if interest rates went up (if banks decide to pass on those higher rates to depositors). On the flipside, higher interest rates make a mortgage or other loan more expensive. Interest rates also impact the value of investments: increasing interest rates are typically bad for bonds and create somewhat of a headwind for stocks (click here for an explanation), although other factors, like an improving economy, can more than offset that headwind.

Originally posted as part of the Finimize daily email.

The top 2 financial news stories in 3 minutes. Join over one million Finimizers

Read next

Prada Stumbles Down The Catwalk

Sign up to Finimize

Get the two most important global financial news stories each day. Sent at midnight UK time.

Get started with one email a day

The top financial news stories in 3 minutes.