For the second time, the US Federal Reserve (Fed) is raising interest rates. As of 14 December (US Time), the US Fed Fund rate range is 0.5 to 0.75 percent. Is that a good or bad thing for us? Well… It depends on which side of the fence you’re on. Let’s take a look at some (almost) immediate impacts as we move towards the new year in 2017.
1. US Dollar will strengthen (that means SGD will weaken)
Just like last year when the Fed raised interest rates for the first time in almost a decade, the US Dollar has strengthened and will continue to. In fact, the US Dollar strengthened even before the rate hike, particularly because the market anticipated it. But more importantly, Asian currencies weaken when the US Dollar strengthens. This means that purchases from Amazon or any other product and service in the US Dollar will become more expensive for us (your Amazon Prime subscription just got less worth it..).
If you happen to hold US Dollars (physically or index ETFs) for whatever reason, though, you’ll probably be grinning to yourself. Furthermore, since we are likely going to experience more rate hikes in 2017, the US Dollar might climb higher in the future too. That being said, the Fed doesn’t always hold up to its word, does it? Or rather, the Fed’s decision to raise rates still depend largely on the (US’s) economic data.
2. Borrowing will become more expensive (but saving gets rewarded more)
Just as you would expect, when the Fed raises interest rates, the next to move are banks. Borrowing is not necessarily immediately a lot more expensive – it’s 0.25 percent raise anyway – but it gets much more significant for huge loans. These include housing loans and credit card bills (only if you have a huge outstanding amount, that is). Singapore’s interest rates won’t move today or tomorrow but we can definitely expect changes very soon.
With that in mind, saving gets rewarded more! Not a whole lot, though. Unless you have a huge amount of liquid money or savings, it wouldn’t mean much. If you are one of those in short-term bonds, you will be smiling to yourself too – those yields hit their highest levels in five years. Even then, if you have some money on the sidelines, then you should be searching for cheap stocks.
3. Equities sell-off (presenting opportunities for fundamentally great stocks)
The Straits Times Index (STI) fell right when the stock market opened and registered a 0.6 percent decline at just 9:30am. While it is hard to predict how the rest of the markets will react, we can be almost certain that there will bound to be sell-offs as capital flows back to the US following the rate hike. In such self-offs, panicked investors tend to overestimate the negativity and this presents opportunities for investors who are able to sniff out them out.
For those who are in the stock market and experiencing the heartaches as stock prices fall, this is not necessarily the best time to sell. A minor decline shouldn’t scare you off your positions that are meant to be long-term. If those long-term and fundamentally strong stocks are what they are, their prices will recover when uncertainty stabilises.
Long story short…
1. Don’t purchase too many products and services priced in US Dollars
2. Clear your credit card bills and refinance house loans. Save!
3. Search the stock markets for fundamentally strong stocks that are beaten down in the panic sell-off.