Why should you care:
He is the new chief of the US Central Bank “Federal Reserve” (Fed) and whatever he says matters to your interest rate on your mortgage in US and has large implications to the dollar. He had his testimony this week that laid out his “views” on the interest rates and the US economy. He is more “Hawkish” than predecessor Yellen, meaning he is more likely to increase interest rates than do the opposite.
What did he say:
He wants to avoid “overheated economy”, this is the key two words. Meaning the Fed is likely to hike (increase) interest rates faster and higher than what the terminal rate is being suggested by the market.
What does it mean to you:
This could mean up to 4 hikes this year and further 2-3 hikes next year, or total of up to 1.5% to 1.75% higher interest rates on your floating US mortgage repayments. If you believe Powell at helm means more hikes than market priced, then look for re-mortgaging fixed rate for 2-5years and switch to floating after. Why switch to floating after 2-5years? Because if Fed has done its hikes, the next move is either no change or cut in rates on any signs of recession. Remember it has been 10 years since 2008 and frankly boom-bust cycles happen every 8-12 years time. On the flip side, at least your savings provide better return…
What happens to the Dollar?
In a simplified way, higher rates should equals to stronger dollar. But due to battle on international trades by Donald Trump tariffs, indirect temptation of having weaker dollar, higher issuance of debt by US (due to Trump tax and infrastructure spending), the ultimate direction of the dollar is far from clear. However, from USD/CNY perspective, Chinese Yuan is gaining strength against dollar over the last 12 months since the highs of 6.95 to 6.33 (that is 6.33 yuan per one dollar), this used to be stable 6.1 back in 2015. For these reasons, the Yuan strength could well start topping out here for Chinese export reasons and future US rates increases could give more a bid for the dollar.
What does this mean to the US equities?
Depends which business, higher interest rates leads to higher corporate debt cost for those businesses that rely on this type of funding. For corporations like Apple who frankly are cash rich, higher interest rates is less of an issue and Fiscal policies by Trump are more important. Also banks that generally rely on higher interest rates to make excess returns should be doing better as well… IF the consumers are not overly stretched on their spending power and this is what needs to be carefully monitored in the future as personal saving is not something to be proud of in US and personal leverage is high (or frankly in most developed countries…more on this another day).
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