Time For A Fed Rate Increase?

The Fed will need to move quickly when the time is right according to Richard Fisher, president of the Federal Reserve Bank of Dallas.

Fisher’s comments threw some people off since the Fed just opted to leave rates unchanged, and promised to keep them their for a while.

But, Mr. Fisher didn’t say now was the time to raise rates, he said (in a nutshell) that once convincing signals of a recovery came about then it would be time to act quickly regarding rates.

Photo by epicharmus, courtesy of flickr

Is the market ready for a Fed rate increase?

Perhaps it is time for interest rates to rise. After all, the impact of a rate increase would not be felt immediately.

However, the news of a rate increase has an immediate impact on financial markets, particularly the stock market. And I don’t think we’re ready for that!

The magnitude of the stock market’s movement depends on the interest rate move investors are expecting versus what actually happens. Generally speaking, a rise in interest rates sends stocks lower and an interest rate cut sends stocks higher.

Not all rate moves follow these trends, but below you will find the basic logic behind the trends.

Rate increases – Higher interest rates make financing costs higher, and naturally, businesses do not like paying more to borrow funds. Higher interest rates on bonds also make stocks look less attractive relative to the amount of risk they carry.

Rate cuts – Lower interest rates make for cheaper financing, which Wall Street likes. Lower rates on bonds make stocks appear more attractive due to the higher expected rates of return.

So, what is the Fed to do at its next meeting in early November: raise the rate or leave it alone?