Everything that you need to know about the Fed Rate Hikes

The next Fed hike is here soon! The Fed hiked once each in 2015 and 2016, but may hike 3 or 4 times this year. And next year. And possibly the next. Don’t fight the Fed. But should investors exit the market? Does Fed really matter to non-US investors? Let’s find out… (The answers may surprise you!)

What does “Fed rate hike” really mean?

It means that the Federal Reserve is raising US interest rates. Higher interest rates keep inflation in check and slows economic growth.

Why does the Fed hike interest rates?

The Federal Reserve has mandate to maximise employment and stabilize prices in the US. It raises interest rates to prevent overheating when the economy is growing too quickly. Conversely, it cut interest rates to stimulate the economy during recessions.

How exactly does the Fed raise interest rates?

The Federal Open Market Committee (FOMC) meets several times yearly to set the Fed funds target rate. Commercial banks usually follow the Fed’s lead. The Fed can also buy or sell Treasuries to influence interest rates.

What is the impact of higher interest rates?

Higher interest rate means businesses pay more for financing. This impacts their expansion plans, cashflows and dividends to shareholders. Consumers also pay more their mortgages, credit cards and auto loans. This impacts their spending on other discretionary items.

Does Fed rate hikes matter to non-US investors?

Absolutely. The global cycle is influenced strongly by the US cycle. Financial markets are closely connected. US rate hikes do affect emerging markets.

Are Fed rate hikes bearish signals?

Fed hikes do cause some market volatility, but are not necessarily bearish signals (a very common misunderstanding). After all, the Fed tends to hike when the US economy is growing quickly.

Which types of investments perform best when Fed is hiking rates?

Historically, equities perform the best and US Treasuries perform the worst during the hiking cycle.

Where are we in the Fed hiking cycle?

In the hiking phase. The Fed raised rates once in Dec 2015, Dec 2016 and Mar 2017. It will continue to raise rates in the coming years.

How many times does the Fed expect to hike interest rates?

According to the Fed’s dot plot, it expects to keep raising rates to 3.0% by 2019. This implies another 8 hikes of 25 basis points each.

How should investors position their portfolio in a raising interest rate environment?

Prefer USD investments and banks to benefit from higher rates.

Avoid US Treasuries, pure dividend plays and highly indebted companies.