The market is buzzing in anticipation with the possibility of another interest rate hike, but FOMC is not about to call it unless the conditions are right. In July, the world waited in anticipation for the Federal Reserve Committee to announce another US base interest rate hike of about 0.25%, following last December’s increment.
However, FOMC maintained caution, holding firm to the current rates and now, investors and analysts are anticipating that the announcement, which could take the US base interest rate to 0.75%, will be made in September.
High interest rates are great for the markets because investors enjoy more returns with every increment. However, increasing interest rates when economic indicators do not support the decision can be equally catastrophic.
This is why the US Federal Reserve and market analysts have maintained caution over further increments in the near future, citing stagnant inflation rates as a cause for concern. High interest rates also result in increased returns for lending companies, especially on loans and other credit products they issued on a floating rate.
Nonetheless, this is not always good news for borrowers, as this means paying more than previously, which then results in increased cash outflows. This can often lead to increased rates of credit default, thereby pushing lending rates even higher as lenders move to tighten their terms.
According to this review of Lexington Law from Credit Marvel, more people are now seeking to improve their credit scores in order to avoid premium lending rates. In 2014, the company claims to have fixed more than 7.3 million negative items from its clients. At the time, while base interest rates in the US remained at 0.25%, the average lending rate was 3.25%.
The December increment has pushed the rate to 3.5%, but that depends on how good an individual’s credit score is. According to estimates and rankings from lending companies, a credit score of 720 or more is considered to be excellent, while a score of 660-719 is ranked average/fair. Those who have a credit score of 620-659 are deemed to have a poor score, while anyone with 620 and below is considered to have bad credit.
Credit Karma has analyzed the credit score and age distribution and found that people aged 55 years and above tend to have good-excellent credit, with an average score of 696, while the rest of the population has an average of poor credit score.
This distribution stat is significant when you start analyzing the reasons behind each individual’s credit spending, as well as targets on becoming debt free. For instance, people aged 55 years and above will most likely be edging towards retirement, which means that having a huge debt on their accounts would not reflect well.
These people are cautious when it comes to investing in risky assets like stocks and are more focused on putting their money into safer outlets, like real estate and gold. They most likely only have a couple of credit cards, as compared to their younger counterparts, who have an average of 7 cards.
With the younger generation, credit risk is high and this explains their lower credit scores. However, according to FICO’s recent credit quality analysis report, people appear to be working their way up the scores ladder, with significant growth in 2015 for those with a score of 800-850, 700-749 and 650-699, compared to the years 2007, 2009 and 2013.
For the past two years, the US has been expected to increase interest rates. However, it was not until last December that the US Federal Reserve finally played one of its cards for tightening the monetary policy, ticking the base interest rate up by 0.25 points.
It appears though, that did not affect the credit quality in the country. Although, borrowers with floating interest rate products should have noticed differences on their bank statements as early as the beginning of this year.
On the other hand, the anticipation of increased interest rates has continued to boost the market's sentiment, with stocks rallying significantly following an early scare at the beginning of the year. The global economy continues to wait, but with more increments expected in the coming months, investors remain optimistic.
Conclusion
In summary, high interest rates, which in most economies are seen as a bad omen, especially for borrowers, are turning out to be a good problem to have in the market, as investors weigh the real impact of economic growth versus the potential increment in interest rates.
Disclosure: I have no position in any stock/commodity mentioned in this article.
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