The longest drumroll within the 102-year history of the Federal Reserve precedes its next interest-rate increase. That doesn\’t mean some of its effects will not be surprising.
Investors can pay now for Fed rate hike, or pay more later
Investors will pay now, or may more later because the longer the Fed waits to boost rates, the greater damage it might foist on stock markets. Read on
\”This is really a major inflection point,\” said Erik Davidson, chief investment officer for Wells Fargo & Co.\’s private bank. \”The end of free money is in sight.\”
The policy-setting Federal Open Market Committee meets this week. It\’s expected to push the \”liftoff\” of interest rates till a minimum of September. In preparation, here are some expected winners and losers and those whose fortunes will probably stay steady following the Fed and its chair, Janet Yellen, raise the benchmark rate for the first time since 2006:
WIN: The greenback
The U.S. dollar could keep rallying after the rate increase, said Daniel Tenegauzer, head of emerging market and global foreign-exchange strategy at RBC Capital Markets in Ny. Other central banks are cutting rates and expanding the money supply, weighing down their currencies.
\”The Fed hikes, the dollar appreciates,\” Tenegauzer said.
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LOSE: Emerging-market economies
Brazil, Turkey and South Africa will likely possess a tough time in the second half of 2015 because money will flow toward the U.S., said Stephen L. Jen, managing partner and co-founder of SLJ Macro Partners LLP working in london.
\”Already, the currency markets are again showing signs of stress and I feel that you will see moments later this season that investors will smell panic in these markets,\” Jen said.
DRAW: Commodity prices
Boom and bust cycles in commodities are decades within the making, so an interest rate increase would have little impact on recent price declines, said Robert Stimpson, a fund manager at Oak Associates Ltd. in Akron, Ohio, which manages about $900 million.
In short, don\’t blame Yellen.
WIN: Global stocks
A stronger dollar from the rate increase will boost U.S. demand for products from Asia and Europe, helping lift corporate profits in those regions. The U.S. stock market will still be able to eke out more gains, said Matthew Whitbread, who helps manage $11 billion for Barings Asset Management. Banks will benefit because they\’ll be able to profit more from making loans, he explained.
LOSE: Corporate borrowers
Companies happen to be borrowing like crazy the past few months as though trying to get their last loans and bonds secured prior to the rate increase. That\’s made it simpler for them to buy back shares and pay dividends — things that make them look more appealing to investors. All that\’s poised to end, said Charles Peabody, an analyst at Portales Partners LLC in Ny.
\”There are a lot of pressures on management to lever up to improve returns,\” Peabody said. \”It will be a problem if rates of interest go up.\”
LOSE: Federal budget
The U.S. government could pay as much as $2.9 trillion more in interest over the next Ten years if rates slowly escalate, according to calculations through the Congressional Budget Office and Dean Baker, co-director of the Center for Economic and Policy Research in Washington.
What Christopher Whalen, senior managing director at Kroll Bond Rating Agency Inc., known as the \”huge wealth transfer from savers to debtors\” during the last six-plus years of near-zero rates will probably continue. Returns on money market funds, longtime havens for retirees and others on fixed incomes, have cratered to near-zero from 4.79 percent in October 2007, prior to the financial crisis, according to Crane Data LLC. Savers will probably be the last to benefit from higher rates.
DRAW: Mortgage rates
The Fed is signaling that it\’s going to move cautiously once it raises rates. That may help limit any upward push on longer- term Treasury yields, said Priya Misra, head of U.S. rates strategy at Bank of the usa Merrill Lynch in New York. In turn, that will keep mortgage rates from rising rapidly.
WIN: Insurance companies
Since they invest customers\’ premiums using the aim of being able to cover losses with the profits, insurance companies hate the zero-interest-rate policy, or ZIRP. U.S. property-casualty insurers are earning an average annualized yield of 3.1 percent on investments, the cheapest in half a hundred years.
That will improve, albeit slowly, because the Fed raises rates, said Douglas Meyer, an analyst at Fitch Ratings.
\”It\’ll have an effect over time, a favorable impact on earnings across virtually every product line,\” Meyer said.
WIN: The Fed
A rate increase means the U.S. economy has improved — a mission accomplished for the most powerful financial institution in the world.
\”They\’ve been given a job to complete and a rate hike is really a sign that at long last there\’s material progress in the industry cycle,\” said Lou Crandall, chief economist at Wrightson ICAP in Jersey City, Nj.
LOSE: The Fed
With a \”ceremonial rate rise\” coming and also the end of their bond-buying program, the Fed has emptied the majority of the bullets from the figurative gun and does not have the ammunition to lift the economy should there be another downturn, said Daniel Alpert, managing partner of Westwood Capital LLC.
Likewise, raising rates and then having to cut them again will be the Fed\’s \”nightmare scenario\” and it will do its better to avoid that, said Aneta Markowska, chief U.S. economist for Societe Generale SA.
DRAW: The Fed
Jon Mackay, senior markets strategist at Morgan Stanley, said the Fed has already begun tightening credit – by reducing the bond-buying stimulus referred to as quantitative easing.
\”We\’re 18 months into the tightening process,\” Mackay told Bloomberg TV. \”We\’re in the centre stages.\”
Mackay struck some relief: The rise could be a positive thing for the economy and for the markets, he said, \”versus all this nervousness around when is Yellen going to hike and what color sweater is she wearing today.\”