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Photo by rawpixel on Unsplash

When Interest Rates Rise: Winners and Losers

Video Transcript, Youtube
Transcribed by Glenford S. Robinson
Narrated by the Wall Street Journal

The Federal Reserve is ready for lift off. After holding its federal funds rate near zero for 7 years, the US Central bank has signal, it will begin gradually raising interest rates citing the strengthening of the economy. So, who wins and who loses when rates rise? Let’s start with the winners. Banks have been yearning for the Feds to raise rates to stem the decline in their net interest margin, an important measure of bank’s profitability.
The interest rates banks charge on many loans are directly tied to the Fed’s target rate; so, they will immediately earn more interest on those items; thereby, boosting the banks bottom line.

Higher rates will also strengthen the US dollar, but there is also growing consensus that the dollar’s biggest gains may already be in the rearview mirror. The green back has appreciated over 20% against other currencies since July 2014 in anticipation of a rate hike. A strong dollar is a positive for consumers buying goods or traveling overseas, but the flipside is that a strong dollar ends up hurting American exporters.

Life insurers have been the biggest cheerleaders for a sustain rise in interest rates. Most insurers earn substantial income from investing premiums, and they typically favor high quality bonds whose yields have plummeted in recent years amid extended low interest rate conditions.

Now, for some losers in an environment of higher rates; a rising dollar in the wake of a rate hike, could way on oil prices by making dollar-traded oil, more expensive for buyers using foreign currencies. It also would hurt US oil producers by making oil production more expensive in the US and for companies using local weaker currencies, and gold is expected to struggle once the US central bank hikes rates, as the precious metal doesn’t pay interest and cost money to hold. Thereby, making it less appealing than other heavens like treasury bonds.

Rate-sensitive stocks such as consumer staples, telecom, and utilities are those with high dividend yields. These companies have been popular with investors over the past few years for generating steady income. But with rising rates, bond yields are poised to become more attractive to investors looking for relatively stable places to park their money, and here is a draw when it comes to higher rates: In general, higher mortgage rates hurt home affordability as potential buyer cannot spend as much on a home to get the same monthly payment. But contrary to that logic, a hike in short-term interest rates doesn’t spell trouble for the housing market, at least not yet. Short-term rates have an indirect relationship to mortgage cost, which are still near historically low levels. The Fed is expected to hike rates gradually and in small increments and that could potentially spur prospective buyers to lock-in a home loan now instead of later.

Source:

Wall Street Journal
Published on Dec 16, 2015

WSJ rounds up who stands to benefit and lose the most whenever the Federal Reserve decides to raise interest rates.
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