The Federal Reserve raising interest rates for the first time in nearly ten years gives both the global economy and financial markets a good indicator that some significant changes are coming with the start of the New Year.
Beginning of the End
The move could be viewed as the beginning of the end of last year’s global financial crisis with the biggest economy in the world feeling confident enough to venture into the territory of higher interest rate and considers the rest of the globe in a stable enough position to handle the move.
This, of course, is not without its own risks, especially to emerging economies that have their currencies tied to the dollar. This could result in a significant currency outflow as interest rates in the U.S. rise. This will shift concerns away from developed economies towards emerging markets, however, as the two are connected, each could significantly affect the other.
From Macro to Micro
The end of the crisis brings some changes to the financial markets. While a lot of investors searched for security in financial assets, such as bank deposits, rated as risk-free during the crisis, now with the crisis receding, those funds may do better invested elsewhere. As a result, equities have risen dramatically, with many rising to where they are considered at full value. However, if the rise in interest rates makes the dollar stronger, the return on those equities may be affected.
On the other hand, this is an indicator that the economy is transitioning from the crisis years, where macroeconomic factors drove the financial markets. With this stage over, the markets may now be entering a phase where micro drivers determine what the returns will be on investments. This may result in a shift in investment strategy, as buying a carefully picked stock may become more profitable than investing in an index.