Fed Raises Interest Rates and Signals Additional Increase in 2018

[DonViejo]

Source: The New York Times



By Jim Tankersley
June 13, 2018

WASHINGTON — The Federal Reserve raised interest rates by a quarter of a percentage point on Wednesday and signaled it will raise rates two more times this year, a shift driven by officials’ increasingly rosy assessment of the economy.

A statement released at the end of the Fed’s two-day meeting took several steps to show officials no longer view the United States economy as primarily needing a boost from monetary policy, and are beginning to worry more about the threat of inflation.

Officials noted that economic activity has been rising “at a solid rate,” a change from their May statement, when they called the rate “moderate.” They removed a line stating that “market-based measures of inflation compensation remain low” and several sentences that expressed caution over the Fed’s future rate moves, including that “the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.”

While the Fed previously telegraphed three rate increases in 2018, officials indicated they now expect a fourth rate increase before year-end, a sign of continued strength in the American economy. The expectation of an additional rate hike is the result of a single vote shifting toward more increases among the officials who comprise the Federal Open Market Committee.

Read more: https://www.nytimes.com/2018/06/13/us/politics/what-to-watch-as-federal-reserve-prepares-to-raise-interest-rates.html

[mahatmakanejeeves]

1. Federal Reserve Chair Powell News Conference Federal Reserve Chair Jerome Powell speaks to reporters

Federal Reserve Chair Powell News Conference Federal Reserve Chair Jerome Powell speaks to reporters following a 2018 Federal Open Market Committee meeting.

https://www.c-span.org/video/?446909-1/federal-reserve-chair-jerome-powell-holds-news-conference

[DeminPennswoods]

2. This is good news for investors in bonds and interest bearing

bank accounts. It's also good for social security and other pensioners who get COLAs. The years of near 0 interest rates coupled with extremely low/no inflation have resulted in stagnant pension and benefits.

[FBaggins]

5. Not for existing bond investors

Bond values decline as rates go up

[HeartachesNhangovers]

7. Is that true?

If you buy a bond, the issuer agrees to pay a certain interest rate at certain intervals (the coupon) and then, after the bond matures, you get the par value. No matter what happens to interest rates, none of this changes: the coupon value, maturity period and par value remain the same.

Your bond value declines only if you try to sell it before it matures, in which case you aren't a bond investor (who wants regular payments and then the par value), you are a bond speculator (who bought a bond at a certain price and wants to sell it at a higher price).

I'm principally a bond investor. I only invest in bond mutual funds that hold many different bonds with different interest rates, maturities and par values; I don't invest in individual bonds. I've read several analyses that show (using historical data from increasing-interest-rate periods) that even when interest rates are going up, someone who invests in bond mutual funds might lose money if they try to sell their funds, but if they simply hold them for the long-term, within 2 or 3 years they come out ahead because even the old, lower-interest bonds continue to pay and the new bonds that the fund buys are at a higher interest rate so your dividends go up, eventually making up for whatever hit your bond fund price took.

Bottom line: If you invest long-term in bonds or bond funds - invest, not speculate - you come out ahead, even in an increasing interest-rate environment.

[Igel]

8. There are reasons to sell apart from speculation.

You need the capital, for instance, instead of the dividends. IRAs, for example, sell off bonds.

Or there's a recall.

Hold till maturity and you have a fixed interest rate.

[DeminPennswoods]

10. Yes, that's my experience, too

The mutual fund share price might decline a bit, but over time as mutual bond funds buy new bonds, the interest payments are larger.

[Igel]

9. COLAs and OASDI depend on inflation.

Not the prime rate.

[DeminPennswoods]

11. Higher interest rates generally result in higher inflation

and ultimately higher COLAs.

[redstatebluegirl]

3. A large majority of Americans have credit card debt.

Many times due to loss of a job, taking care of medical expenses etc. It is not always heavy spending on things. These people will suffer horribly as the banks who function as loan sharks where credit cards are concerned, gouge them legally. Many will never get out from under this.

[IronLionZion]

4. Every time they raise rates, I trim some stocks and shift into bonds and savings

a lot of people do the same to protect their money from the inevitable downturn.

[lagomorph777]

6. Taking the punch bowl away just before the election.

Perfect.