iBooyah.com: The FOMC decision is...
On Tuesday, August 8, 2006 at 2:15 PM ET, the FOMC will announce their decision whether to raise the federal funds rate. The current rate currently stands at 5.25%. If the FOMC decides to continue tightening, it is widely expected they will raise it by another1/4 point, which would be 5.5%. If so, this would mark the 18th straight increase.
How does this affect you and me? Well, the federal funds rate directly affects our pocket book. The immediate affect will be felt through our credit card rates as it would increase along with our home equity line of credit. While the federal funds rate does not directly affect mortgage rates, it too will likely increase (Mortgage rates are usually determined by the 10 year Treasury bond). Borrowing money will get more expensive.
Further FOMC tightening could cause the stock market to sell off. Why would the market sell off? The fundamental reason is higher interest rate is a competition to stocks. Think about it. If you can earn 5.5% on your money without assuming any risk, that’s pretty good. Most banks will likely raise the return on their Certificate of Deposits in order to compete for your business. In short, for those of us who prefers leaving our money in the bank and letting it earn interest, it is a good thing.
In the past, everyone in the investment community have the Fed’s action pretty much figured out. This time, it's anyone guess. Given the sluggish new job creation number the past three months, the slower than expected GDP and the slow down in real estate market are evidence suggesting the Fed previous increases have done the job. The economy has slowed. The stock market should rally if the Fed’s statement suggests inflation is contained and further tightening is not in the foreseeable future.
