Federal Reserve Rate Hikes Will happen Faster Than Expected

April 12, 2018
1015 Views

Most consumers and investors are aware that the Federal Reserve has planned to increase rates this year. A strengthening economy means that the nation can now afford to take on interest rate increases.

News of rate increases had initially worried investors, as borrowing would become more expensive, and some feared that higher rates would reduce corporate investment. Now investors are even more concerned, as the Fed has announced that increases could be steeper than initially thought.

The Situation So Far

The Federal Reserve increased federal funds rates by less than a percentage point in March of this year. The figure went from 1.5%, up to 1.75%. Although the impact hasn’t been immediately noticeable, the increase will eventually change the interest rates on loans, credit cards, and home mortgages.

Rates have been gradually increasing since 2015, as North America has stepped well out of the last major financial crisis. Although the rates have been going up, they haven’t been significant enough to cause major concern.

The situation now is different, as the economy is stronger and continues to show signs of growth. Consumer spending is higher and corporate growth is steady. This means that the Fed is confident that more rate increases will not only be sustainable, but that they will be able to keep the economy progressing at a manageable rate.

This week, details of the Fed’s most recent policy meeting were revealed to the public. A statement from the central bank said that “Members agreed that the strengthening in the economic outlook in recent months increased the likelihood that a gradual upward trajectory of the federal funds rate would be appropriate.”

Two major changes emerged from the meeting:

  • There could be three more rate increases in 2018.
  • There could be a minimum of three rate increases in 2019.

How Worried Should You Be About Federal Reserve Interest Rate Increases?

Rate increases can raise the cost of long term borrowing, however, they are often designed to be closely aligned to the current economic situation. At this time, the rate increases are still within economic growth forecasts, so the real impact should be offset by higher spending power.

The Fed has forecast economic growth of 2.75% over the next year.

Companies will still be able to afford to borrow in an economy with higher interest rates, and recent tax cuts should mean that the impact on consumers is minimal. The most obvious areas of impact will be in long term borrowing like mortgages. As far as investment goes, increased rates could change stock holder confidence, but shouldn’t stop the strong growth of American industry and corporations.

Investors should take more time to analyze how rate changes will affect corporations, rather than rely on predictions or fears that may not eventuate.

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