U.S. Raises Interest Rates
What happened and what it means to you.
Yesterday as expected the US fed raised their target federal funds rate to 0.75%. In her speech Federal Reserve Chairman Janet Yellen stated that “Job gains have been solid in recent months and the unemployment rate has declined” in addition inflation has increased “considerably”. These are good signs that the economy is recovering at a strong pace than expected at the beginning of the year. They believe that it is growing strong enough that the Federal Reserve anticipates another 3 raise hikes before 2018 and continue into 2019, eventually bringing the US fed fund rates closer to their long-term average. This means the US will still experience below average interest rates for the next 2 years.
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The planned rate hikes in 2017 and 2018 are not unsimilar to what we heard last year and we only saw one rate hike in 2016. This was mainly due to the global economic conditions and the effect a strong US dollar would have on it. The fed will closely monitor these effects and they have shown in the past to be conservative if they feel the risk is too large.
What may be some of the consequences of the rate hike? It will undoubtedly increase the value of the US dollar which will make it difficult for US companies that sell globally as the strong American dollar will make their products/services seem expensive. Also, almost all commodities are based in US dollars, therefore the prices of these commodities may be suppressed. The most common being oil and gold, both of which saw a small decline yesterday as a result of the rate hike.
The good news, besides the confirmation that the US is in good shape, is that countries that export to the US will have an advantage as their product would be cheaper for the American consumer. Canada exports more to the US than to any of our other trading partners, therefore this should be good news for our economy. Canadian companies that focus on exporting their goods/services have been taking advantage of the strong US dollar and this should only increase their revenue.
In the market, there should be some short -term volatility as money shifts to areas that will benefit from the rate increase. In the long-term, this increase is good news as we received confirmation that US economy is improving and as a result we hope Canada will receive a much needed boost to its economy as our goods/services look much more attractive.
Konrad, Justin and Merriel
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