All eyes will be on the Federal Reserve this week
The biggest story in markets this week is likely to be the Federal Reserve meeting Wednesday – the official debut for new Fed Chair Jerome Powell (above). The Fed is broadly expected to raise interest rates to 1.75 percent from 1.5 percent, in the first rate hike for 2018.
It doesn’t sound like a lot, but every time the Fed hikes rates it has an impact on the global financial markets.
Higher interest rates mean banks are charged more to borrow from the Fed, but this can be a boon for investors in bank stocks, because the banks then charge their customers more to borrow money, which improves the profits they make on loans, pumping up their share prices. However, it also means businesses are charged more on loans and subsequently have higher debt expenses, which can negatively affect their bottom line (profits).
Global stock markets have gotten used to low interest rates ever since the financial crisis, and now rate levels are returning to ‘normal’, we may see a gradual slowdown in equity markets as the era of ‘easy money’ comes to an end alongside a rollback of QE (quantitative easing).
Jerome Powell has taken over the post of Fed Chair over at a delicate moment. He will have to finish the job that his predecessor (Janet Yellen) started – rolling back the extraordinary measures taken after the financial crisis, without causing a relapse. With US economic growth moving up at a pretty rapid clip, the Fed is the central bank that is spearheading this move back to a more ‘normal’ economic environment. This is going to be tricky enough by itself, let alone the fact his boss (Trump) has just added a substantial stimulus to the economy through the Republican tax bill.
Investors will be closely watching on Wednesday to see whether Powell shifts expectations of future rate hikes. Will the Fed hike faster for example? Time will tell, though given Powell has been referred to as “annoyingly normal” by friends, according to the Washington Post, it’s likely he will want to maintain a more gradual approach to monetary policy, inkeeping with Yellen before him. The big question is how many times they will hike. 3 is expected, but it could be 2 or 4, depending on the Fed’s outlook.
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