Interest rates are going up. The Federal Reserve in June hiked rates for the second time in 2018. And there could be two more rate hikes before the end of the year. Here is how you can take advantage of other positive outcomes from Fed rate increases.
Higher returns for savers
Low interest rates have been a drag on savers. Any improvement, even modest, is welcome.
“Interest rates have been so low for so long that many people have fallen out of the habit of rate shopping,” said Robert Frick, economist for Navy Federal Credit Union. “But now that rates are rising they should get back into the habit and will be seeing bigger payouts from their accounts.”
A positive inflation scenario after a rate increase might include “lower prices of imported consumer goods, due to a likely higher exchange value of the dollar if our domestic rate increases are not matched by policy tightening in other major economies,” said Daniil Manaenkov, U.S. forecasting specialist at the Research Seminar in Quantitative Economics at the University of Michigan.
A credit bubble received some of the blame for the financial crisis in 2007. In the aftermath, lending came to a complete stop. Lending has resumed. “Banks may have a greater incentive to loan out reserves at higher interest rates, and the increased flow of additional credit would boost economic growth,” said Sean Snaith, director of the Institute for Economic Competitiveness at the University of Central Florida.
Stronger dollar to boost purchasing power
As the Fed continues to boost rates (and with the outlook for more increases to come), the U.S. dollar gets more support. Ultimately, that means more purchasing power with the greenback compared with other currencies.
Fed tightening “is likely to mean a somewhat higher dollar, so people traveling to Europe will do well,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington.
Stocks will trade on fundamentals
Stock prices may start to make more sense and not reflect the central bank’s easy monetary policy quite so much. “A normalization of rates would return the focus to market fundamentals and off of focusing on the nuances of each Fed statement,” said David Nice, former senior economist at DS Economics in Chicago.