It is common knowledge that the United States has been enjoying a booming economy for a while. Unemployment has been down to enviable lows, wages are on the rise (albeit slowly), and the dollar has been so strong these past months that American stocks are even getting expensive. In light of these events, there has been a lot of talk about an interest rate hike in the weeks to come – an issue that might shake the global markets even further.
The Federal Reserve (the American equivalent of a central bank) announced the possibility of a rate strike that may occur this September. They have a policy meeting to discuss this issue happening Sept 16-17. As interest rates haven’t risen in a decade, people are not sure what to expect from this measure.
In practical terms, an increase in the interest rates means the price of having money is high. This is good for the people who have them – those who have been rigorously saving up in their bank accounts ever since the 2008 crisis. But it is bad news for the have-nots, the ones who have to borrow money from the bank.
How exactly would a rate hike impact people’s lives? Obviously, loans will become more expensive due to the higher rates. Mortgages specifically will go up, making it more costly to own a home. That is why in 2015 the real estate sector has enjoyed a great demand, as many people tried to secure mortgages at the current lower rates.
This information is useful for traders in many ways. For one thing, if a hike does happen this year – something that currently seems very likely – investment in the United States will become more expensive. Secondly, American stocks, which are already seen as too costly by some, might go up even further, discouraging new investments and adding extra volatility to the already shaken global financial markets.
Mind you, the interest rate hike is nothing but a possibility at this point. It has not been confirmed yet, as members of the Federal Reserve are of divided opinions. Some of them are reluctant to take such measures on account of the turbulence resulting from China’s economic slowdown. At the same time, some analysts are joking that the Fed’s indecisiveness is only adding to the confusion, and are urging them to arrive at a decision.
With the dollar going strong and the potential of a rate hike, we urge you to think about your position – are you an owner or a borrower? Because things are about to get tough – maybe. Stay alert, dear traders.