What a Fed rate hike means for you

Patrick Gillespie | 12/15/2015, 10:30 a.m.
America, get ready for higher rates.

3. Stock markets roller coaster could get more bumpy

If you invest at all in stocks and bonds -- even if you just have a 401(k) -- a Fed rate hike will be important to you and your portfolio.

It could trigger volatility in stock and bond markets, which are already on a roller coaster ride. Just last week, U.S. stocks had their worst week in months.

And there's plenty of other factors that are already concerning investors: falling oil prices, China's continued economic slowdown and actions from other central banks around the world.

Most other banks, like the European Central Bank, are moving in the opposite direction and cutting interest rates. China's central bank cut rates in October too.

4. Dollar could gain versus global currencies

The divergence between interest rates in America versus other countries is expected to cause the U.S. dollar to become stronger.

That's great news for world travelers, but it would hurt all types of U.S. companies that sell products abroad.

Also some investors are pulling their money out of global investments parking it in the U.S. -- higher rates make assets priced in dollars more attractive.

Others are getting out of emerging markets like Turkey and Brazil. Those countries sometimes borrow loans that have to be paid in U.S. dollars.

Once the dollar's value rises, those loans get more expensive and difficult to pay back. It creates financial stress and can lead to default and ultimately hurt the broader economy.

It's already been a bad year for many developing nations. The MSCI Emerging Market Index, which captures stock market performance, is down nearly 20% so far this year.

So just be ready for a bumpy ride in the global markets.

5. Can the global economy get back on track?

The Fed's actions have huge implications for the global economy.

The Unites States is linked more than ever before to major players around the world. China's slowdown has hurt other emerging markets. Japan is barely growing. Europe is struggling with low economic growth too. It's been a rough year for emerging markets across the board.

To varying degrees, all that weighs on the U.S. economy and the Fed.

The concern is that the Fed's rate hike can cause a boomerang effect: (1) the Fed raises rates, (2) that hurts other economies even more, and then (3) economic woes in developing countries eventually hurt U.S. trade and economic growth.

The U.S. manufacturing sector has already shrunk as a result of the weak global economy and strong U.S. dollar.

The U.S. economy has made lots of progress since the recession, but it's still not at the finish line, some say.

"We've come a long way from the depths of the recession, but we're still not quite back to where we'd like to be," says Croushore, the former Fed economist.


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