Interest rates are rising in the US
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Associate Editor
David Stevenson Feb 19, 2010
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Last night the US Federal Reserve finally put interest rates up.
Sounds dramatic, put like that. In fact, when you look at the details, there wasn't too much to see. A 0.25 percentage point hike in the discount rate – which is charged to banks on direct loans from the Fed - from 0.5% to 0.75% is hardly likely to make a big dent in bankers' profit margins.
But it's still the first such move since June 2006. And although the US stock market closed higher on the day, the Fed news came out after the close. Stock index futures – which flag the next move in the market – dipped 1%. Overnight, Asian stocks took a bit of a bath, with the MSCI Asia Pacific index dropping 2.3%. European markets are down today.
So how big a deal is this rate rise? Traders have been chatting about a Fed rate hike for months. But talk's one thing, reality is another.
Rising interest rates generally hurt share prices for two main reasons. First, they raise the level of returns available elsewhere. And second, they mean that companies will have to pay more for the money they borrow, as we discuss in today's Money Morning.
Remember, the US central bank has poured trillions into the American economy to try to curtail the recession. Now it's trying to look tough – just to show that boss-man Ben Bernanke and his henchmen aren't really under Wall Street's thumb. This is the first real sign that the Fed cashpoint is now closed.
We may not see more Fed action for a while. This decision "says absolutely nothing" about the timing of the first increase in the wider-watched fed funds rate – which sets the tone for global interest rates – says former Fed governor Larry Meyer.
But the key point is that the interest rate game has now changed. California State University economics professor Sung Won Sohn sums it up: "the bottom line is the Fed is signalling that future rates are more likely to go up, rather than stay stable or go down."
What's more, higher US rates would also mean the dollar getting a further boost. We've been bullish here for a while: How to profit from a rebound in the dollar
That's not good for global share and bond prices, which have enjoyed the 'sweet spot' of almost zero rates and central bank 'liquidity injections' for several months. For stock and bond markets, this Fed move signals that the easy money era is at an end.
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