BackWhen the Fed hikes rate, who wins, who loses, who draws
A list of winners and losers and those whose fortunes are likely to stay steady after the Fed decision
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New York: The longest drumroll in the 102-year history of the Federal Reserve precedes its next interest-rate increase. That doesn’t mean some of its effects won’t be surprising.
“This is a major inflection point," said Erik Davidson, chief investment officer for Wells Fargo & Co.’s private bank. “The end of free money is in sight."
The policy-setting Federal Open Market Committee meets this week. It’s expected to push the “liftoff" of interest rates till at least September. In preparation, here are some expected winners and losers and those whose fortunes are likely to stay steady after the Fed and its chair, Janet Yellen, raise the benchmark rate for the first time since 2006.
The US dollar will keep rallying after the rate increase, said Daniel Tenegauzer, head of emerging market and global foreign-exchange strategy at RBC Capital Markets in New York. Other central banks are cutting rates and expanding the money supply, weighing down their currencies.
The US government could pay as much as $2.9 trillion more in interest over the next 10 years if rates slowly escalate, according to calculations by the Congressional Budget Office and Dean Baker, co-director of the Center for Economic and Policy Research in Washington.
What Christopher Whalen, senior managing director at Kroll Bond Rating Agency Inc., called the “huge wealth transfer from savers to debtors" over the last six-plus years of near-zero rates will probably continue. Returns on money market funds, longtime havens for retirees and others on fixed incomes, have cratered to near-zero from 4.79% in October 2007, before the financial crisis, according to Crane Data LLC. Savers will likely be the last to benefit from higher rates.
A stronger dollar from the rate increase will boost US demand for products from Asia and Europe, helping lift corporate profits in those regions. The US stock market will still be able to eke out more gains, said Matthew Whitbread, who helps manage $11 billion for Barings Asset Management. Banks will benefit because they’ll be able to profit more from making loans, he said.
Companies have been borrowing like crazy the past few months as if trying to get their last loans and bonds secured before the rate increase. That’s made it easier for them to buy back shares and pay dividends—things that make them look more attractive to investors. All that’s poised to end, said Charles Peabody, an analyst at Portales Partners LLC in New York.
“There are a lot of pressures on management to lever up to improve returns," Peabody said.
The Fed is signalling that it’ll move cautiously once it raises rates. That could help limit any upward push on longer- term Treasury yields, said Priya Misra, head of US rates strategy at Bank of America Merrill Lynch in New York. In turn, that will keep mortgage rates from rising rapidly.
Since they invest customers’ premiums with the aim of being able to cover losses with the profits, insurance companies hate the zero-interest-rate policy, or ZIRP. US property-casualty insurers are earning an average annualized yield of 3.1% on investments, the lowest in half a century.
That will improve, albeit slowly, as the Fed raises rates, said Douglas Meyer, an analyst at Fitch Ratings.
Brazil, Turkey and South Africa will likely have a tough time in the second half of 2015 because money will flow toward the US, said Stephen L. Jen, managing partner and co-founder of SLJ Macro Partners LLP in London.
“Already, the currency markets are again showing signs of stress and I feel that there will be moments later this year that investors will smell panic in these markets," Jen said.
Boom and bust cycles in commodities are decades in the making, so a rate increase would have little effect on recent price declines, said Robert Stimpson, a fund manager at Oak Associates Ltd in Akron, Ohio, which manages about $900 million.
A rate increase means the US economy has improved—a mission accomplished for the most powerful financial institution in the world.
“They’ve been given a job to do and a rate hike is a sign that at long last there’s material progress in the business cycle," said Lou Crandall, chief economist at Wrightson ICAP in Jersey City, New Jersey.
With a “ceremonial rate rise" coming and the end of its bond-buying programme, the Fed has emptied most of the bullets from its figurative gun and won’t have the ammunition to lift the economy if there’s another downturn, said Daniel Alpert, managing partner of Westwood Capital LLC.
Jon Mackay, senior markets strategist at Morgan Stanley, said the Fed has already begun tightening credit—by reducing the bond-buying stimulus known as quantitative easing.
“We’re 18 months into the tightening process," Mackay told Bloomberg TV. “We’re in the middle stages."
The rise could be a good thing for the economy and for the markets, Mackay said. Bloomberg
Daniel Kruger, Doni Bloomfield, Susanne Walker Barton, Sonali Basak, Ye Xie, Michelle F. Davis, Liz Capo McCormick, Jody Shenn, Lisa Abramowicz and Matthew Boesler in New York, Craig Torres in Washington and Noah Buhayar in Seattle contributed to this story.
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