Right before the holidays rolled into town, the stock market saw volatile changes. During the first and second week of December, the market saw significant drops; the most significant came on December 18th, when the Dow dropped a staggering -367. Two days prior to the big drop The Federal Reserve raised interest rates a quarter of a point. While some may argue that the volatility of the market was directly influenced by the rate hike, that actually isn’t the case. It is actually the other way around. The volatility during the weeks leading up to holidays were influenced by oil prices, the Asian markets and other factors. The rate hike was influenced by the market, the market was not influenced by the rate hike.
As it turns out, the rate hike might actually have been an early New Years present for investors. There is some short-term growing pains from the hike, but there will be significant gains during the new year, especially when you consider the fact that interest rates are now being influenced by normal market conditions, rather than artificial factors. So, what are the short-term pains?
- A higher cost of doing business: In the short-term, loans, insurance and real estate prices will jump in the face of the interest rate hike. Daily costs will jump up.
- Economic growth: Early on, economic growth will slow, as investors adjust to the altered interest rates
- Stagnant Market: The Zero Interest Rate Policy that was instated to stimulate the market did just that, but now that interest rates are reinstated, the market may go a bit stagnant. It won’t be a long-term effect, but in the short-term some investors may see it as a sign of shifting policies, which will lead them to hold back.
While there is some short-term growing pains, the interest rate hike will be a good thing in the long run. So, what are the long-term gains?
- A stronger dollar: The dollar will be straightened in a natural way through the hike, rather than artificially. This is always a positive sign.
- Slowing of Inflation: Inflation has been an issues of the course of the last two years, but a raised interest rate will help to temper that growth significantly, make it easier for people to feed and house themselves.
- Goods news for Savers: Those invested in CDs and other savings accounts will see positive interest rate growth, too. Banks utilize the market to set their interest rates, the interest rate hike means more savings for those in the savings account game.
- What you See is What you Get: The raised interest rate ensures that stock prices are accurately reflecting value. Without the interest rates artificial inflation of value happens, the raised interest rate has created a more natural reflection of value
Overall, the raised interest rate might have looked like bad news leading into the holiday season, but now that the holiday haze has lifted, we can finally see that the Fed has done something right; they’ve actually given investors a great New Years present, the gift of natural market conditions.
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