The US Federal Reserve has delivered another interest rate hike overnight – its third since the Global Financial Crisis and second within three months – with the United States economy still on a path of slow, but steady, growth.
The Fed’s benchmark rate now sits in a range between 0.75% and 1% with another two interest rate hikes flagged for 2017 as the central bank seeks to head off rising inflation.
The overnight hike was broadly anticipated with the market almost fully pricing it in. However, it seems investors may have been somewhat underwhelmed by the Fed’s projections for the remainder of the year. As such, the US dollar fell sharply which caused the Australian dollar ($A) to soar.
Indeed, the Australian dollar rose no less than 2% to just over US77.1 cents, up from around US75.6 cents. That in itself could cause the share prices of businesses such as Cochlear Limited (ASX: COH), Westfield Corp Ltd (ASX: WFD) and ResMed Inc. (CHESS) (ASX: RMD) to move today, given the amount of earnings which these businesses generate internationally (a stronger Australian dollar could hurt their earnings).
Similarly, businesses such as QBE Insurance Group Ltd (ASX: QBE) and Computershare Ltd (ASX: CPU) would likely benefit from a hike in US interest rates. However, if the Fed’s projections for future interest rate increases disappointed investors, then shares of those businesses may come under some pressure.
As such, investors should be on the lookout for potential knee-jerk reactions from the market today or in the near future. If a business you’ve had your eye on for a while happens to be sold off (for no other apparent reason) and you still perceive it as being good value, it could be a great opportunity to load up.
The move also spurred significant movements in commodity prices with gold, iron ore and oil prices all trading significantly higher.
What happens next?
It is encouraging to see the US economy continue to recover following the Global Financial Crisis, with other economies around the world also following suit. Australia’s own cash rate remains at a record low of 1.5%, although it seems entirely possible the Reserve Bank of Australia could look to increase our own interest rates in 2018, or perhaps even later this year.
Regardless, I wouldn’t expect it to rush such a decision, nor would I expect it to rapidly increase interest rates, particularly given the strength of the housing market. That said, interest rates are at a record low right now, and a move back to normality is necessary in the medium- to long-run.
As for investors, I would suggest taking a step back and looking at the bigger picture. Focus on businesses you expect will do well in the long run and do your best to ignore any short-term noise.
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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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