What are the effects of the Federal Reserve's Interest Rate Increase on stock market, housing market and your life?

ANSWER

STOCK MARKET

Although profitability on a broader scale can slip when interest rates rise, an uptick is typically good for companies that do the bulk of their business in the United States. That is because local products become more attractive due to the stronger U.S. dollar. That rising dollar has a negative effect on companies that do a significant amount of business on the international markets. As the U.S. dollar rises—bolstered by higher interest rates—against foreign currencies, companies abroad see their sales decline in real terms. Companies like Microsoft Corporation, Hershey, Caterpillar, and Johnson&Johnson have all, at one point, warned about the impact of the rising dollar on their profitability. Rate hikes tend to be particularly positive for the financial sector. Bank stocks tend to perform favorably in times of rising hikes.

Although the relationship between interest rates and the stock market is fairly indirect, the two tend to move in opposite directions—as a general rule of thumb, when the Fed cuts interest rates, it causes the stock market to go up and when the Fed raises interest rates, it causes the stock market as a whole to go down. But there is no guarantee of how the market will react to any given interest rate change the Fed chooses to make.

HOUSEING MARKET

Higher interest rates and higher inflation typically cool demand in the housing sector. For example, on a 30-year loan at 4.65%, homebuyers can anticipate at least 60% in interest payments over the duration of their investment. But if interest rates fall, the same home for the same purchase price will result in lower monthly payments and less total interest paid over the life of the mortgage. As mortgage rates fall, the same home becomes more affordable—and so buyers should be more eager to make purchases.

CONSUMER'S LIFE

A rise in borrowing costs traditionally weighs on consumer spending. Both higher credit card rates and higher savings rates due to better bank rates provide fuel a downturn in consumer impulse purchasing. When interest rates go down, consumers can buy on credit at lower cost. This can be anything from credit card purchases to appliances purchased on store credit to cars with loans.