Everyone has been awaiting the Federal Reserve's decision to raise interest rates for some time now. In this time, many investors have taken action on investments without considering the full risk in hopes for a greater return. With this type of wishful thinking, many have taken personal pleasure in their investments crediting it to their self worth, while disregarding the future implications of the near zero interest rates.
Further, as the time gets closer for the Federal Reserve to make their deacon about raising rates this December, it is unclear how the markets will reacts once the rates do increase. At this point, there has been so much talk about a hike in rates this December that it would be pretty crazy if the Fed didn't raise them. Therefore, with people trying to make predictions about the outcome of the rate change, it is quite difficult to know since the circumstances are so unique. The last time rates rose after being so low was in 1941, which was clearly a long time ago with very different circumstances. Therefore, there are a couple different ways of analyzing the effects of the Federal Reserve.
First off, it is possible that the stock market could weaken with the increased demand of low-risk Treasury bills and people being already wary about shares prices. Housing prices may also weaken when interest rates increase because mortgages will become more expensive. Another thing to consider would be inflation. As raising the interest rates would indicate that of a growing economy, inflation comes hand in hand with economic growth.
There is also the Efficient Markets Theory that denotes all available information is already reflected in market prices. Furthermore, since markets already know everything about rates, an increase in interest rates should already be discounted into share prices. Another approach to look at would be "nonconsequentialist reasoning" which implies that we can't think through consequences of an event until it actually occurs.
It is clear that there are a number of different results the interest rate hike could create, but the real surprise would be if interest rates didn't increase at all.
So what do you guys think will happen at the end of this month? How will the markets react?
http://www.nytimes.com/2015/12/06/upshot/for-any-fed-action-on-interest-rates-an-unforeseeable-reaction.html?ref=economy&_r=0
1 comment:
This kind of relates to my article about Denver and how it, and cities similar to it, could be impacted by a hike in interest rates. At first glance, a raise in interest rates is a great idea, because it signals how the economy has been improving. However, like you brought up, there could be a couple of issues that could possibly weaken the economy. I guess we'll just have to see what happens if and when the rates are raised.
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