US Federal Reserve increases interest rate, first time in 2017

Interest rate goes up as predicted

On Wednesday, 15 March 2017, the US Federal Reserve increased its benchmark interest rate by 0.25%. The Federal Open Market Committee (FOMC) was one vote short of a unanimous vote at 9-1, with Neel Kashkari, President of the Federal Reserve bank of Minneapolis casting the dissent vote. The FOMC voted to raise the key rate to a range of 0.75-1.0%.

Policymakers have targeted to raise interest rates a total of 3 times this year. Janet Yellen, chairperson of the Federal Reserve, claims that such gradual increase is necessary to fend off the need to increase rates rapidly, as this could risk financial market instability, with the possibility of the economy resulting in recession.

Two more rate hikes are expected this year, in June and December, and the median projection is set to rise to 1.4% by the end of 2017.

We’ve all heard the phrase, “two sides of the same coin”. Realistically, no situation comes with only the good (or only the bad). Thus, the following implications are what may affect you when interest rates go up.

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Mortgage Loans: SIBOR trends behind the Federal Reserve interest rates. Till date, there’s still a bulk of mortgages in Singapore that are pegged to SIBOR. For those of us on SIBOR packages, we will likely see a hike in our monthly instalments.

Business Profits: with the increase of borrowing costs, businesses will find themselves paying higher interest rates on their financing, hence eroding their margins.

Home Sales: as borrowing costs increases, and instalments inches higher. Investment properties will realise a lower yield, hence the market will experience reduced demands. As a result, home prices will spiral downwards.

Consumer Spending: with higher borrowing costs, consumers will likely be affected. As credit cards and savings rates are slated to increase, consumer impulse purchasing will be further discouraged.

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Savings: savers, rejoice! An increase in lending rates usually also means that the banks will adjust deposit rates. We should be expecting more interest on our savings!

U.S. Dollars: there will be an increased demand on US dollars, following which, the currency will appreciate, which of course, is good news for anybody who is holding US dollars.

Bank Stocks: congratulations to investors holding banking stocks, as increased interest rates would lead to increased lending margins. This is especially so for a local bank like DBS which has a large pool of low cost deposits and is the market leader in consumer lending.