US Interest rates – FOMC 28-29 July
FOMC meets on 28-29 Jul to chart the course on US interest rates.
Will a rise in US interest rates cause investments to tumble?Even the mere prospect of the Federal Reserve raising interest rates will sent a shock to US markets due to a lack of liquidity – so what can investors expect when policymakers begin to raise interest rates for the first time since 2008?
Fed-watching has become an even more intense since Yellen has been hinting of rate hike more frequently recently.
Many analyst are saying interest rate hikes really aren’t all that terrifying. They’re right, if you judge only by looking at what has happened historically. Here’s the difference this time round. The last time the Fed raised interest rates – a decade ago – the world was a very different place. Nouriel Roubini points out, we’re in a world where there’s a lot less liquidity. That means when the market gets a shock – and even the mere prospect of the Fed raising rates has delivered a shock to the system – the lack of liquidity will cause the market to collapse much faster
Liquidity is the key risk today because banks have reduced their “market making” activities that once helped support prices when market tumble.. Today regulators don’t want banks loading up their balance sheets with all kinds of risky securities when their primary business isn’t to trade for themselves but to facilitate transactions for others, so they’ve made it more costly and difficult to do so. But those new rules and changes have had some unintended consequences for liquidity. Liquidity is vital because it takes a toll on prices. In the US Treasury bond market – which is supposed to be one of the most liquid markets in the world – if there’s no one willing to buy your securities, the price simply collapses.
But what does that mean for both you and I? It means that the value of your investment is likely to swing far more violently as the news flow becomes more apparent about the timing and magnitude of the Fed’s plans for interest rates. Hold off your major purchase till after the FOMC!
We could face some bumpy times in stocks ! It just means that we need to buckle our seatbelts and prepare for what is likely to be a very bumpy ride if Fed announces the rate hike this week!
Take a look at your portfolio and make sure you’re comfortable with the level of risk you’re taking. The coming weeks won’t be easy.
All posts and charts are for educational and illustration purposes only
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