FED HIKES RATES. “In the bond market, too, investors are showing signs of concern about higher inflation and faster rate hikes.” By Todd Horwitz, Bubba Trading

 

The Federal Reserve raised interest rates on Wednesday and signaled that two additional increases were on the way this year, as officials expressed confidence that the United States economy was strong enough for borrowing costs to rise without choking off economic growth.

Jerome H. Powell, the Fed chairman, speaking in unusually blunt terms at a news conference on Wednesday, said the economy had strengthened significantly since the 2008 financial crisis and was approaching a “normal” level that could allow the Fed to soon step back and play less of a hands-on role in encouraging economic activity.

The Fed’s optimism about the state of the economy is likely to translate into higher borrowing costs for cars, home mortgages and credit cards over the next year as the central bank raises interest rates more quickly than was anticipated.

Mortgage rates have been climbing. The average rate on a 30-year fixed rate mortgage climbed to 4.66% this year in May, the highest in seven years, before falling slightly in recent weeks. Home mortgage rates tend to move with the bond market, but rates can also rise because of a higher federal funds rate. A higher rate makes it more expensive for banks to borrow money, which can translate into higher borrowing rates for consumers.

In the bond market, too, investors are showing signs of concern about higher inflation and faster rate hikes. The yield on the 10-year Treasury note recently hit the highest level in almost seven years. The Fed’s decision Wednesday was driven by “indications that inflation is right around the corner,” said Jason Reed, an economist and finance professor at the University of Notre Dame’s business school. 

Inflation has been mysteriously low during the long economic recovery. But it has finally passed 2%, the level the Fed considers healthy.

Keep those stops tight
Todd “Bubba” Horwitz

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Financial Markets & Political Commentary

 

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About the author

Todd Horwitz - Author of “Average Joe Options“. Todd began his trading career in 1980 at the CBOE. He was one of the original traders in the OEX & helped start the SPX. He is a member the CME where he trades S&P futures as well as foreign currencies & is a regular contributor to CNBC, Bloomberg, BNN, Fox & many other major news networks.