Why the World Will Stop to Hear the Fed

by Justin Weinger on April 27, 2014

When the Fed pause to speak, the world often listens. If you’re already an investor then you’ll know all about why the world (as well as ordinary Americans) are so pre-occupied with what the Fed have to say, but, even if you’re not, you should still be incredibly interested, as the decisions they make will affect the way you run your everyday life. Here’s how:

The Fed’s Impact on Interest Rates

Expected on April 30th, the Fed’s next statement (which will follow a 2 day meeting of the board chaired by Margaret Yelland) could have a sizeable impact on interest rates, propelling us closer to a hike.

Interest rates have now been at historically low levels for the past 5 years and, although there is no widespread belief that this meeting of the Federal Open Market Committee will see a formal rise in the interest rate level, there is a strong stream of thought that suggests that we may see a strong signal from them that change is to come. In the past, the Fed has stated that they will consider hiking the rates when inflation falls to 2 percent and unemployment falls below 6.5 percent. Contrary to what many thought months ago, however, these are not the only factors that the Fed will look towards, and only last month they stated that they will view a range of issues. What these are is currently unclear, but it adds further weight to the view that a rate hike now is unlikely.

So, with this in mind, how are the markets reacting, and what should investors be particularly wary of before the announcement?

Credit Cards

One area where we are likely to see little to no change is in credit card interest rates. At present, this rate stands at 13 percent and shows absolutely no sign of shifting whatsoever. Due to this long term stability, it is highly likely that no matter what the Fed says, the rate will remain largely unchanged.

Savings

Improvement is expected here in the next year, especially as the rate currently languishes at only 1 percent. However, when the Fed make their announcement, it is likely that this rate will rise by only a quarter of a percentage point (a figure still well below inflation). Although little change is expected in the short term, there could be a larger hike on long term savings accounts.

Mortgages

Traders with ECN metatrader accounts will have noticed that interest rates for home loans have dropped to 6 week loans (a source of much discussion amongst seasoned traders on social forex sites). Such a decline has been caused by a drop in the 10 year treasury rate (the main driver of mortgage rates) and lower than expected employment figures.

Of course, the Fed’s announcement at the end of April could potentially have a huge impact on all of these rates, particularly if they give us an indication as to whether there will be a hike in interest rates. The world will be listening and regardless of whether you’re an active trader or an everyday citizen, you should be as well.

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