wnol.info May 24 2018

Fed Rate Hike Will Mean Higher Credit Card Interest Costs

May 24 2018, 01:53 | Rex Rios

James Bullard president of the St Louis Fed wants to end distortions to the bond market


The federal funds rate, the benchmark overnight lending target, now stands at 0.75 percent to 1 percent after a quarter-point increase that marked the second rate increase in three months but only the third in more than a decade.

As U.S. Federal Reserve policy makers debate how to shrink a massive balance sheet built through years of bond-buying stimulus, several are calling publicly for action, with two suggesting the portfolio should be allowed to shrink starting later this year. The current rate hikes are small (in increments of 0.25% so far) to avoid spooking investors and stalling the economic recovery.

Probably not much, advertising specialty executives say. "It's inconsequential", said Ziskind, chief operating officer at Top 40 distributor CSE (asi/155807).

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Granted, if the pace of rate increases changes, it could stir up volatility again. On the contrary, he reckons that a rise in mortgage rates will only benefit the real estate market. However, even with incremental changes, effects from Fed rate hikes will cascade through to consumers. Low labor productivity will effectively offset the positive consequences that rising inflation could have in regard to output and worker compensation. This is good news because it can be seen as reassurance that although mortgage rates are increasing, they shouldn't climb too fast. So when rates rise, high-yield bonds are less impacted because their yield is more generous from the get go. But immediately after the November election interest rates have been skyrocketing for a few reasons, going up well over one percentage point.

Muzzillo offered additional perspective. "They could move to short or intermediate rate bonds or look to the worldwide market". Because investors were anxious what the Fed would say later in the week, at the conclusion of the central bank's scheduled meeting. Don't bank on seeing an increase in savings account rates. Under current Fed forecasts, that means interest rates will remain low enough to encourage borrowing and spending for perhaps three more years as the Fed slowly climbs back to a "neutral" interest rate estimated at around 3.0 percent. Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis, voted to postpone the rise.

Now, the trend is shifting as employment appears full and inflation is gaining steam. At that stage, there was no mention of four rate increases and the overall language on rate increases this time around was slightly more hawkish.

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