{"id":625,"date":"2015-06-17T10:06:16","date_gmt":"2015-06-17T14:06:16","guid":{"rendered":"http:\/\/www.c2ig.com\/?p=625"},"modified":"2015-06-17T10:06:16","modified_gmt":"2015-06-17T14:06:16","slug":"who-wins-who-loses-when-fed-raises-rates","status":"publish","type":"post","link":"http:\/\/www.c2ig.com\/2015\/06\/who-wins-who-loses-when-fed-raises-rates\/","title":{"rendered":"Who Wins, Who Loses When Fed Raises Rates"},"content":{"rendered":"

June 17, 2015\u00a0\u00a0\u00a0\u00a0 Bloomberg<\/p>\n

Alexandra Scaggs, Isaac Arnsdorf and Joseph Ciolli<\/p>\n

The longest drumroll in the 102-year history of the Federal Reserve precedes its next interest-rate increase. That doesn\u2019t mean some of its effects won\u2019t be surprising.<\/p>\n

\u201cThis is a major inflection point,\u201d said Erik Davidson, chief investment officer for Wells Fargo & Co.\u2019s private bank. \u201cThe end of free money is in sight.\u201d<\/p>\n

The policy-setting Federal Open Market Committee meets this week. It\u2019s expected to push the \u201cliftoff\u201d of interest rates till at least September. In preparation, here are some expected winners and losers and those whose fortunes are likely to stay steady after the Fed and its chair, Janet Yellen, raise the benchmark rate for the first time since 2006:<\/p>\n

WIN: The greenback<\/strong><\/p>\n

The U.S. dollar will keep rallying after the rate increase, said Daniel Tenegauzer, head of emerging market and global foreign-exchange strategy at RBC Capital Markets in New York. Other central banks are cutting rates and expanding the money supply, weighing down their currencies.<\/p>\n

\u201cThe Fed hikes, the dollar appreciates,\u201d Tenegauzer said.<\/p>\n

LOSE: Federal budget<\/strong><\/p>\n

The U.S. government could pay as much as $2.9 trillion more in interest over the next 10 years if rates slowly escalate, according to calculations by the Congressional Budget Office and Dean Baker, co-director of the Center for Economic and Policy Research in Washington.<\/p>\n

DRAW: Savers<\/strong><\/p>\n

What Christopher Whalen, senior managing director at Kroll Bond Rating Agency Inc., called the \u201chuge wealth transfer from savers to debtors\u201d over the last six-plus years of near-zero rates will probably continue. Returns on money market funds, longtime havens for retirees and others on fixed incomes, have cratered to near-zero from 4.79 percent in October 2007, before the financial crisis, according to Crane Data LLC. Savers will likely be the last to benefit from higher rates.<\/p>\n

WIN: Global stocks<\/strong><\/p>\n

A stronger dollar from the rate increase will boost U.S. demand for products from Asia and Europe, helping lift corporate profits in those regions. The U.S. stock market will still be able to eke out more gains, said Matthew Whitbread, who helps manage $11 billion for Barings Asset Management. Banks will benefit because they\u2019ll be able to profit more from making loans, he said.<\/p>\n

LOSE: Corporate borrowers<\/strong><\/p>\n

Companies have been borrowing like crazy the past few months as if trying to get their last loans and bonds secured before the rate increase. That\u2019s made it easier for them to buy back shares and pay dividends — things that make them look more attractive to investors. All that\u2019s poised to end, said Charles Peabody, an analyst at Portales Partners LLC in New York.<\/p>\n

\u201cThere are a lot of pressures on management to lever up to improve returns,\u201d Peabody said. \u201cIt will be a problem if interest rates go up.\u201d<\/p>\n

DRAW: Mortgage rates<\/strong><\/p>\n

The Fed is signaling that it\u2019ll move cautiously once it raises rates. That could help limit any upward push on longer- term Treasury yields, said Priya Misra, head of U.S. rates strategy at Bank of America Merrill Lynch in New York. In turn, that will keep mortgage rates from rising rapidly.<\/p>\n

WIN: Insurance companies<\/strong><\/p>\n

Since they invest customers\u2019 premiums with the aim of being able to cover losses with the profits, insurance companies hate the zero-interest-rate policy, or ZIRP. U.S. property-casualty insurers are earning an average annualized yield of 3.1 percent on investments, the lowest in half a century.<\/p>\n

That will improve, albeit slowly, as the Fed raises rates, said Douglas Meyer, an analyst at Fitch Ratings.<\/p>\n

\u201cIt\u2019ll have an impact over time, a favorable impact on earnings across virtually every product line,\u201d Meyer said.<\/p>\n

LOSE: Emerging-market economies<\/strong><\/p>\n

Brazil, Turkey and South Africa will likely have a tough time in the second half of 2015 because money will flow toward the U.S., said Stephen L. Jen, managing partner and co-founder of SLJ Macro Partners LLP in London.<\/p>\n

\u201cAlready, the currency markets are again showing signs of stress and I feel that there will be moments later this year that investors will smell panic in these markets,\u201d Jen said.<\/p>\n

DRAW: Commodity prices<\/strong><\/p>\n

Boom and bust cycles in commodities are decades in the making, so a rate increase would have little effect on recent price declines, said Robert Stimpson, a fund manager at Oak Associates Ltd. in Akron, Ohio, which manages about $900 million.<\/p>\n

In other words, don\u2019t blame Yellen.<\/p>\n

WIN: The Fed<\/strong><\/p>\n

A rate increase means the U.S. economy has improved — a mission accomplished for the most powerful financial institution in the world.<\/p>\n

\u201cThey\u2019ve been given a job to do and a rate hike is a sign that at long last there\u2019s material progress in the business cycle,\u201d said Lou Crandall, chief economist at Wrightson ICAP in Jersey City, New Jersey.<\/p>\n

LOSE: The Fed<\/strong><\/p>\n

With a \u201cceremonial rate rise\u201d coming and the end of its bond-buying program, the Fed has emptied most of the bullets from its figurative gun and won\u2019t have the ammunition to lift the economy if there\u2019s another downturn, said Daniel Alpert, managing partner of Westwood Capital LLC.<\/p>\n

Likewise, raising rates and then having to cut them again would be the Fed\u2019s \u201cnightmare scenario\u201d and it will do its best to avoid that, said Aneta Markowska, chief U.S. economist for Societe Generale SA.<\/p>\n

DRAW: The Fed<\/strong><\/p>\n

Jon Mackay, senior markets strategist at Morgan Stanley, said the Fed has already begun tightening credit — by reducing the bond-buying stimulus known as quantitative easing.<\/p>\n

\u201cWe\u2019re 18 months into the tightening process,\u201d Mackay told Bloomberg TV. \u201cWe\u2019re in the middle stages.\u201d<\/p>\n

Mackay struck a note of relief: The rise could be a good thing for the economy and for the markets, he said, \u201cversus all this nervousness around when is Yellen going to hike and what color sweater is she wearing today.\u201d<\/p>\n

–With assistance from Daniel Kruger, Doni Bloomfield, Susanne Walker Barton, Sonali Basak, Ye Xie, Michelle F. Davis, Liz Capo McCormick, Jody Shenn, Lisa Abramowicz and Matthew Boesler in New York, Craig Torres in Washington and Noah Buhayar in Seattle.<\/em><\/p>\n

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