The US Federal Reserve has raised interest rates again over night, will share markets fall as a result?
Australia’s Reserve Bank of Australia (RBA) is in charge of deciding what the interest rate should be for the economy. The US Federal Reserve does the same job in the US. It has been raising interest rates in recent years to make up for the record-lows during the GFC.
US Fed raises rates
Overnight, the US Fed increased its benchmark by another 0.25% so that its rate now sits at 2.25% to 2.5%.
This may have been a surprise to some investors with President Donald Trump wanting the Fed to slow down on the increases. President Trump allegedly wants lower rates to mitigate the negatives of his trade war with China.
The Federal Reserve released further projections about where its members expect the interest rate to be in the next couple of years. Policymakers now expect two more rate hikes in 2019 and one in 2020.
The rate increase was widely expected but it still caused many of the leading US technology shares to fall. The Apple share price fell 3.1%, the Amazon
share price declined 3.6% and Facebook shares went down 7.25%. Facebook fell more than the rest because it is being sued for the Cambridge Analytica scandal.
Australian investors could send the share prices of some ASX tech businesses down today as well. Analysts will be watching the share prices of Afterpay Touch Group Ltd (ASX: APT) and its peers closely.
Why are the share values going down?
Interest rates are a key factor for deciding asset values. Investors can get a ‘risk-free’ return from government bonds, or cash in the bank.
When interest rates are higher it means that investors are less likely to want to invest in property or shares. It means there are fewer buyers who are less willing to pay as much for those assets. Many investors use a Discounted Cash Flow to value shares, interest rate changes affect this too.
Whatever happens next, it is always worth being picky about the price you pay for your shares. Three shares that could be likely candidates to get through market volatility unscathed are the three proven shares in the free below report.
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