higher interest rates mean higher borrowing costs (something to consider: if you have a variable rate mortgage and believe that Fed will eventually hike interest rates, think about locking in at current low rates with a fixed-rate mortgage), lower asset prices, reduced risk-premium and a stronger greenback. All of these are relatively bad for the stock market. Higher discount rates mean lower stock prices, while reduced risk-premium makes equities less attractive compared to new issues of bonds. Higher borrowing costs hurt indebted companies, while a stronger greenback negatively affects the exporters and international businesses, which are a significant part of the U.S. stock market. This is why the equity indices were generally falling in March in anticipation of the Fed’s hike and surged after the publication of the dovish FOMC statement.
Personally,I am not sure of a rate hike anytime soon because of the recent decline of the American dollar. Do you think that rates will go up soon? Are you in favor of higher interest rates anytime soon considering all the consequences cited in the article and the declining dollar(this month)?
No, I don't think they will raise rates. Something I've been learning so far in this class and I talked to Kate about a couple week's ago during class is the psychology behind a lot of these decisions. For example in Bernanke's book, he described the financial crisis as a "self-fulfilling prophecy" with a lot of the crisis having to do with a loss of confidence in institutions. In the case of this article and speculation over rising rates, the author states, "This is how markets generally work: investors buy the rumor and sell the actual event." Of course the speculation is over if/when they will do this. But to me it's fascinating how just the speculation changes market behavior.
ReplyDeleteI think that they should raise the interest rates. It has been talked about so frequently that people have been expecting it for awhile. At this point I think that people have prepared for it but the lack of actual action in raising the interest rate is the reason that monthly numbers are going down.
ReplyDeleteI seem more harm than good in raising interest rates too soon. I do think that they should raise them eventually, however, it's too early into the economy's recovery to do so. Furthermore, the most recent financial crisis is best considered a "balance sheet" recession, because many companies became overloaded with debt or couldn't collect on their receivables. An early rise in interest rates would further detriment these levered firms, and overall recovery in general.
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