The Federal Reserve has been a major topic of discussion throughout the year 2015, and for good reason. At the end of 2014, the Fed ended its quantitative easing program and announced that they planned on increasing their record low interest rate by the end of the year 2015. While earlier attempts at a rate hike were thwarted thanks to poor economic activity in the United States and around the world, positive economic movement led to a 0.25% hike following the December FOMC meeting. Today, we’ll talk about how a rate hike affects market activity, what we’ve seen in the market thus far and what we can expect to see as a result of the rate hike moving forward.
The Basics Of What A Rate Hike Means
The Federal Reserve is making a huge decision that can come with serious ramifications when it raises its interest rate. There are a couple of things that need to be taken into account when determining how its going to affect the market, and economy for that matter…
Consumer Spending – When the Federal Reserve increases its interest rate, consumers will be forced to spend more money on interest. This leads to less spending elsewhere, which can harm GDP and corporate earnings.
The USD – Another major issue here is the fact that when the interest rate increases, we generally see an increase in demand for the USD, leading to a stronger currency. With a stronger USD, commodities struggle and exports tend to fall as the cost of US based products and commodities rise in nations outside of the United States.
What We Can Expect To See As A Result Of The Rate Hike
Moving forward, things will likely get a bit concerning. Ultimately a rate hike from the Fed is a bad thing for the market as well as the global economy. Here’s what I’m expecting to see…
US Market – Since the rate hike, we’ve seen incredible declines in the Dow Jones Industrial Average, S&P 500 and NASDAQ alike. Unfortunately, I believe that these declines are far from over. The reality is that this isn’t the first rate hike we’ve seen from the Fed. Historically, following a rate hike, we’ve seen declines in the market that last for months at least. This is exactly what I’m expecting to see in this case.
Commodities – It’s important to remember that commodities are generally priced using the USD. Because the value of the USD generally climbs following a rate hike, commodities like oil, gold and silver become more expensive in nations outside of the United States. As a result, demand for commodities declines and we see the value of commodities drop. This is a trend we’re likely to see throughout the year 2016.
Global Economic Conditions – Unfortunately, a higher rate from the Federal Reserve is an incredibly bad thing for global economic conditions. First off, this is likely to weigh heavy on emerging economies that are heavily dependent on commodities. Also, US consumers are going to be less likely to pay more money for imported products… leading to pain around the globe. Ultimately, this could lead to an incredibly hard time for the global economy.
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