Federal Reserve Eyes Further Rate Hikes in 2018
The Federal Reserve raised its key lending rate on Wednesday, March 21; the first meeting under new Chairman Jerome Powell. The rate hike is a sign of confidence that the U.S. economy is getting strong with low unemployment and rising wages. The big question is how many more times will the Fed raise rates in 2018 and how will it affect the economy and stock market?
In March, the fed lifted its key lending rate, which helps determine the rate for credit cards, mortgages, auto loans, and other borrowing, to a range of 1.5% to 1.75%. Even in a range of 1.5% to 1.75%, interest rates are still near historic lows.
The March rate hike represents an increase of a quarter of a percentage point from the last time the Fed raised its rates in December 2017.1 It was also the sixth time the Fed has raised interest rates since December 2015, when it started to reign in its monetary policy for the first time since the 2008/2009 financial crisis.
Central banks use interest rates as way to regulate the U.S. economy and control inflation. During the financial crisis, the Federal Reserve artificially lowered interest rates in an effort to encourage businesses and individuals to borrow and spur economic activity.
Now that the U.S. economy is chugging along, economists are wondering how aggressive the central bank will be in 2018 with its rate hikes. If the Fed raises rates too quickly it could hurt the U.S. economy and hammer debt laden Americans. If it goes too slow, the U.S. economy could heat up too much.
Case in point, the U.S. economy is doing well and wages are inching higher, but Americans are saddled with debt. In fact, at the end of 2017, total U.S. household debt hit an all-time high of $13.5 trillion. It was also the fifth consecutive year in which household debt advanced, with increases in the mortgage, credit card, auto, and student loan categories.2
Higher rate hikes might be great for financial institutions and those who have money in the bank, but there aren’t a lot of Americans with disposable income. What higher rates will do is make borrowing more expensive, which could dampen U.S. economic activity related to housing and car sales. It will also be a burden for Americans carrying that record debt.
Current projections forecast three or four interest rate hikes in 2018.3 Most are hoping the Fed will raise rates gradually, but stronger U.S. economic growth and signs that inflation is on the rise could result in more aggressive rate hikes.
While the U.S. economy is churning out solid quarterly gross domestic product numbers, Trump’s recently approved tax cuts and public spending could stoke the economy a little too much. If this happens, the Fed will need to raise rates more aggressively to cool the economy down.
But the U.S. is not an economic island. The U.S. is also in the midst of a trade war with China, the second largest economy in the world, as well as trade disputes with a number of other countries, including Canada and Mexico.
Trade barriers are of course bad for the U.S. economy: inflation goes up, there is less growth, and lower productivity. This could result in more gradual rate hikes.
All of which will affect U.S. business sectors and industries differently. Knowing which ones to invest in will make all the difference.
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Interest rate hikes impact the U.S. economy and stock market on a number of different levels. The impact of a U.S. rate hike is also felt in Canada; that’s because our two economies are so closely enmeshed. When it comes to rate hikes south of the border and investing, the trading experts Learn-To-Trade.com can show you how you can trade confidently and profit consistently.
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- “Federal Reserve issues FOMC statement,” Federal Reserve, March 21, 2018; https://www.federalreserve.gov/newsevents/pressreleases/monetary20180321a.htm.
- “Household Debt Jumps as 2017 Marks the Fifth Consecutive Year of Annual Growth,” New York Federal Reserve, last accessed April 16, 2018; https://www.newyorkfed.org/microeconomics/hhdc.html.
- Cox, J. “Fed’s Dudley: More than four interest rate hikes unlikely this year,” CNBC, April 16, 2018; https://www.cnbc.com/2018/04/16/feds-dudley-more-than-four-interest-rate-hikes-unlikely-this-year.html.
Photo Credit: iStock.com/JimVallee
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