Fed rate hike

It seems like this has been in the news for some time with people looking at the possibility of it happening and the potential results. But now it's happened as the Fed increased its federal funds target rate to 0.25%-0.50%, ending the period of near-zero interest rates. So, what does this mean for us?

(Image source: commons.wikimedia.org)

The Fed interest rate is the rate that depository institutions, such as banks and credit unions, lend money to other depository institutions overnight on an uncollaterized basis to meet their reserve requirements. There are many more minute details to this, which you might want to see at Investopedia. (especially the video, it explains stuff like how the Fed influences the Fed interest rate)

This shows that the Fed views the US economy as expanding and is starting to increase the Fed interest rate which is likely to increase interest rates across the board. The logic goes that as the US economy improves, inflation may start climbing and to maintain inflation at a moderate rate, the Fed increases its interest rate to discourage loans, driving down demand for goods and services, thereby decreasing inflation.

The Fed interest rate hike seems to have had some mixed reactions. Markets went up then down, while commodity prices such as oil dropping, with (WTI) oil in particular falling below $35. An increase in the interest rates is not good for shares as there would be a higher risk-free rate, which in turn leads to lower valuations, while for companies with huge amounts of debt (and don't loan money), the cost of their debt would increase, affecting their profits as well.

The other ways which this might affect us is also an increase in the SIBOR and SOR rates, which would increase the amount needed to service the mortgages if we are on a floating-rate mortgage. There may also be an increase in the interest rates in Singapore, making the Singapore Saving Bonds (SSBs) a possible option. For some reference, before the Fed started to decrease interest rates in 2008, the 10-year SGS rates hovered around 3% in early-2007, which is higher than the current ~2.5%.

I think those are some of the main ways that the Fed interest rate hike will be able to affect us. But there may be more to come as the Fed hopes to gradually increase the interest rate to reach 2% in the medium term.

If you have enjoyed this post and would like to receive notifications on new posts, you can subscribe to my blog via email or like this blog's Facebook page