The U.S. Federal Reserve recently announced that the Federal Funds Target Rate will be increase to 0.5%. This is most likely in response to improving economic conditions in the United Sates. The question many Canadians may be asking is “how does this affect me?”
The Federal Funds Target Rate, which is a trendsetting rate of economic grow and stability, was previously at 0% and has been since the market crash in 2008. The recent decision to increase this rate by The U.S. Federal Reserve is definitely a sign of good things to come for the American economy and its people.
Popular Canadian financial website Rate Supermarket says ” Generally, this is a good news story: the Fed raising rates is a sign that their economy has experienced real improvement since the financial crisis, and they’re gradually rolling back the measures relied on in the aftermath of the Great Recession.”
4 things you need to know about the U.S. Rate Hike
The cost of borrowing will probably increase
The Bank of Canada in Canada and the U.S. Federal Reserve in the United States use interest rates to set targets on the cost of borrowing for banks and consumers. A rate increase means that variable mortgage rates for homeowners will most likely also increase as well as the interest rate on new loans and lines of credit. If you think you need credit it’s best to apply sooner rather than later.
The Canadian currency exchange rate won’t get any better
The interest rate increase from our friends south of the border has implications for our Canadian monetary policy. What does that mean? It means the exchange rate between the Loonie and the American dollar won’t improve any time soon for Canadians. When the U.S. Dollar increases against the Loonie our money is worth less and therefore Canadians will most likely be losing 30-35% on our money when exchanged into U.S. Dollars for a while longer.
It also means that Canadians may not be able to afford more trips down south. That’s not great news for the U.S. economy because if Canadians can’t afford the exchange rate visitors won’t be spending money in (and on products) the United States.
Americans will win in the foreign exchange game
The exact opposite is true for Americans who cross the border into Canada. Americans will continue to enjoy a favorable exchange rate. Just as Canadians loose money on their currency exchange, Americans gain. It’s probably unlikely to see our Canadian and U.S. Dollars at par any time soon, however a U.S. rate hike does show signs of positive things to come.
Cash deposit interest rates will increase
When federal interest rates are very low the banks don’t earn much on their parked cash and therefore can’t pay a lot to clients who have savings accounts. However an increase in interest rates means that clients could very soon be earning more on their cash deposits. Cash is never a good long term investment because it doesn’t pay a very high rate of return, however for your short term savings it’s just right.
We can expect to see a slight increase in interest rates on checking and savings accounts as well as other interest bearing investments such as money market mutual funds and t-bills. When the interest rates increase people are more likely to invest because they start to earn more (even if it’s a little bit) on their money.
This encourages people to save and invest more and that can only mean more positive growth is sure to come for the economy.
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