US Rate Hike in June 2015?

Now that Fed’s assets purchase program has entered into an end, will an interest rate hike happens in near future, says June 2015? To re-iterate, the broad objectives of bond buying program were mainly these two: maximum employment and to achieve 2 percent inflation rate (inflation as of Oct 14 was 1.7%).

It is widely speculated that Federal Reserved will raise the interest rate soon as this cannot be prolonged anymore. In a hyper-low interest rate environment, asset bubbles are inevitable, uncontrollable, and most importantly, can build up fast. This is exactly what happened in the US market. Dow and S&P were making new high ever since Fed announced the ending of QE3 (see chart below). For most of the companies, low interest rate makes it easier for companies to borrow money cheaply, which means more investment, more earnings, and higher stock prices. The result was price gains rose faster than corporate earnings, which is the value underpinning stock prices. With the near to zero interest rate, companies achieved earnings gains by cutting costs, not by increasing revenue. On the investors (or punters?) side,  it also encourages people to invest in stocks, which beats getting 0.1% interest on your bank account. That has pushed Dow and S&P to continuously recording new highs.

Dow & S&P

Dow & S&P

The low interest environment will need to end somewhere soon since Fed has ended its bond buying exercise. Will market drops when interest rate goes up? Well it might but that should not be seen immediately.  Interest rates affect the economy by influencing stock and bond interest rates, consumer and business spending, inflation, and recessions. However, it is important to understand that there is generally a 12-month lag in the economy, meaning that it will take at least 12 months for the effects of any increase or decrease in interest rates to be felt. And bear in mind that Fed could adjust its federal funds rate to keep things balance over the long term.

So, my opinion is still to invest based on fundamental, not too overshadowed by the changes in interest rate.

Will the Fed hinting any rate hike in its next policy meeting Dec 16-17? Lets wait and see.



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  2. hlchang (Post author)

    Thank you. Hope there will be more sharing and exchange of ideas coming up through this space.

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