With a cryptic federal reserve indicating in its October minutes the potential for a year end rate hike, and once again roiling global markets, it is important to keep a grounded perspective. While a rate hike could wreak temporary havoc on bond and currency markets, and potentially, but less predictably, equity markets, there are some distinct positives that will be brought about by the anticipated rate increase.
1) 1) Reduction of market anxiety and uncertainty
There is currently a great deal of uncertainty in world markets about the path of interest rate hikes by the Federal Reserve. A small increase would put an end to some of this uncertainty, show market participants how the increase is going to play out and how it will affect their portfolios, and relieve a great deal of market anxiety.
2) 2) A rate hike could spur some economic activity
Rate hikes are in-and-of themselves a form of inflation. That is, the cost of borrowing money is going up. As such, a rate hike could spur those who may have been planning for a major purchase to go ahead and buy a house, buy a condo, or take on some other credit-financed expenditures. The realization that rates won’t be as low as they are forever can get people off the fence and encourage borrowing and spending....