The Fed Raises Interest Rates, Big Whoop

The Fed Raises Interest Rates, Big Whoop

They’ve been saying it for ages: ‘We will increase interest rates and reduce our balance sheet gradually.’

Interest rates rise

Finally, the US Federal Reserve is following through. Early this morning, the central bank lifted interest rates to a target range of 1.25%–1.5%.

The Fed said they would also step up shrinking their balance sheet. They will offload as much as US$20 billion worth of US bonds in January.

In her FOMC (Federal Open Market Committee) statement, head of the Fed, Janet Yellen said:

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Hurricane-related disruptions and rebuilding have affected economic activity, employment, and inflation in recent months but have not materially altered the outlook for the national economy.

Consequently, the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labour market conditions will remain strong.

Inflation on a 12‑month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

Check out the Fed’s new schedule. Looking at the projects, US interest rates might keep increasing until 2020, reaching approximately 3%.

US interest rates

Source: Bloomberg

But, so what?

Interest between 1.25% and 1.50% still means cash is dirt cheap. Investors and companies would likely still borrow at such rates to fund investments.

US households look as if they could take on higher rates as well.

Take a look at the graph below. It shows US household debt as a percentage of disposable income. In the second quarter of 2017, debt to disposable income was 9.9%, far below 2008 levels.

US debt levels

Source: Fred

What’s more, I don’t think investors are all too concerned about interest rates. In 2017, it seems investors have become numb to almost all news.

Political instability and threats of nuclear war have gone by without notice. Stocks, real estate and cryptocurrencies all continue to climb this year. The only asset that seems to be declining is bonds.

What does this mean for Aussie investors?

Not a whole lot. I’m sure the Reserve Bank of Australia (RBA) is interested in the Fed’s activity. However, we are looking at a different kettle of fish.

Unlike in the US, Aussie households are holding far more debt thanks to high property prices. Aussie employment is strong, but wage growth and inflation remain flat.

Unless both pick up, it’s hard to imagine the RBA lifting interest rates any time soon. But if they do, don’t worry. Like the Fed, it will be a gradual rise. My bet is you might not even notice it.

Cheers,

Härje Ronngard,

Junior Analyst, Markets & Money

PS: Aussie property prices continue to defy gravity. Those who have tried to predict the top have been wrong thus far. And that’s because property prices might still have a long runway ahead.

If you want to read more about long-term booming property, check out our Markets & Money report, ‘Why Australian Property Is on the Verge of a Decade Long Boom’.

Härje Ronngard

Härje Ronngard

Harje Ronngard is a Junior Analyst at Markets and Money.

With an academic background in finance and investments, Harje knows how simple, yet difficult investing can be. He has worked with a range of assets classes, from futures to equities. But he’s found his niche in equity valuation.  

Härje Ronngard

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