Ten Quick things you should know about the Fed Interest Rate Hike

  1. The Fed does not directly affect the interest rates. But it controls these by controlling the money supply through the Fed Funds rate (interest charged by banks to each other on overnight loans).
  2. However, this time the Fed will use two new tools to raise interest rates. Why? Because the balance sheet of the Fed has $4.5 trillion in 2015 as compared to $869 in 2007.
  3. The announcement of a Fed rate hike comes after nearly a decade. Last time the interest rates were raised in 2006.
  4. The Fed had allowed the zero interest-rate policy to stimulate the economy (as it had slowed during the 2008-2009 crisis.
  5. A Fed rate hike means the US economy is strong. But the interest rate hike will be small and gradual.
  6. An interest rate hike will negatively impact borrowers, increasing the cost of borrowing. Student loans, interest payment on credit cards, housing loans will all increase.
  7. Senior citizens, consumers and savers should be happy since income from interest on savings will increase.
  8. The Fed Funds will have an indirect effect on mortgage rates, which will be an adverse one.
  9. It usually takes 12-months for the effect of an interest rate hike to be felt by the entire economy. Having said that, instant reactions that may be short-lived are usually captured in the stock markets.
  10. Many unicorns like Uber (2009), Airbnb (2008) and Snapchat (2012) had either not existed or many were in nascent stage when the last hike happened (between 2004-2006). They have been operating in the low rate environment.

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