The longest drumroll in the 102-year history of the Federal Reserve precedes its next interest-rate increase. That doesn’t mean some of its effects won’t be surprising.
“This is a major inflection point,” said Erik Davidson, chief investment officer for Wells Fargo & Co.’s private bank. “The end of free money is in sight.”
The policy-setting Federal Open Market Committee meets this week. It’s expected to push the “liftoff” 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:
WIN: The greenback
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.
“The Fed hikes, the dollar appreciates,” Tenegauzer said.
LOSE: Federal budget
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.
What Christopher Whalen, senior managing director at Kroll Bond Rating Agency Inc., called the “huge wealth transfer from savers to debtors” 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.
WIN: Global stocks
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’ll be able to profit more from making loans, he said.
LOSE: Corporate borrowers
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’s made it easier for them to buy back shares and pay dividends—things that make them look more attractive to investors. All that’s poised to end, said Charles Peabody, an analyst at Portales Partners LLC in New York.
“There are a lot of pressures on management to lever up to improve returns,” Peabody said. “It will be a problem if interest rates go up.”
DRAW: Mortgage rates
The Fed is signaling that it’ll 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.
WIN: Insurance companies
Since they invest customers’ 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.
That will improve, albeit slowly, as the Fed raises rates, said Douglas Meyer, an analyst at Fitch Ratings.
“It’ll have an impact over time, a favorable impact on earnings across virtually every product line,” Meyer said.
LOSE: Emerging-market economies
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.
“Already, 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,” Jen said.
DRAW: Commodity prices
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.
In other words, don’t blame Yellen.
WIN: The Fed
A rate increase means the U.S. economy has improved—a mission accomplished for the most powerful financial institution in the world.
“They’ve been given a job to do, and a rate hike is a sign that at long last there’s material progress in the business cycle,” said Lou Crandall, chief economist at Wrightson ICAP in Jersey City, New Jersey.
LOSE: The Fed
With a “ceremonial rate rise” coming and the end of its bond-buying program, the Fed has emptied most of the bullets from its figurative gun and won’t have the ammunition to lift the economy if there’s another downturn, said Daniel Alpert, managing partner of Westwood Capital LLC.
Likewise, raising rates and then having to cut them again would be the Fed’s “nightmare scenario” and it will do its best to avoid that, said Aneta Markowska, chief U.S. economist for Societe Generale SA.
DRAW: The Fed
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.
“We’re 18 months into the tightening process,” Mackay told Bloomberg TV. “We’re in the middle stages.”
Mackay struck a note of relief: The rise could be a good thing for the economy and for the markets, he said, “versus all this nervousness around when is Yellen going to hike and what color sweater is she wearing today.”
--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.