Throughout the year, we’ve been hearing quite a bit about the Federal Reserve’s plans to raise interest rates. In the beginning of the year, investors expected for this to happen in June. Once June came and went, new predictions came out for September. However, a rate hike didn’t happen then either. Now the new prediction is that a rate hike is likely to happen in October. While I didn’t agree with earlier predictions, I am on board with an October rate hike. When this happens, turmoil is likely to strike the market. However, there will be one sector that does incredibly well. Big banks are likely to get a big boost. Today, we’ll talk about why the Federal Reserve is likely to raise rates in October, how the move will affect stocks like Bank of America and Citigroup, and what you can do to take advantage of the trends. So, let’s get right to it…
Why The Federal Reserve Rate Hike Is Likely To Happen In October
To understand why the Federal Reserve is likely to raise rates, it’s important to understand why they dropped rates in the first place. This happened during the depths of the worldwide financial crisis of 2008 and 2009. During this time, the global economy was struggling and the Federal Reserve had to do something to stimulate growth in the United States. So, they decided to reduce interest rates which would cause consumers to spend less on interest and more on consumer products; ultimately stimulating the US economy.
Now, it’s up to the Federal Reserve to keep the economy balanced; which requires a rate hike. The reality is that the US economy is no where near crisis mode anymore. In fact, new home sales came in with the highest number we’ve seen since February 2008 in August. Not to mention, if the Federal Reserve continues dragging their feet with regard to rates, it’s likely to hurt consumer sentiment in the US. With the economy showing strong signs, it’s finally time for the Federal Reserve to pull the trigger on rates.
How This Will Push Big Bank Stocks Up
While the market is likely to go through a bit of turbulence as a result of rate hikes, the big bank sector is going to love it! That’s because big banks earn much of their revenue through interest on consumer loans. This means that they mark up the Federal Reserve’s rate to make a profit on loans. When the Fed increases their rate, banks will mark up the new higher interest rate. However, their markup will increase; leading to a higher profit margin. In fact, it’s estimated that if the Fed increases their rate by only 1%, Bank of America’s profits will increase by $2 billion per year! That’s a huge push. As a result, investors are likely to want to be part of the growth, which in turn will push the value of Bank of America, Citigroup and other big bank stocks up.
How Binary Options Traders Can Take Advantage Of The Trends
When the Federal Reserve increases interest rates, we know that we’re likely to see a bump in the value of big banks like Bank of America and Citigroup. Therefore, binary options traders should watch the Federal Reserve’s moves in October for a rate hike. When this happens, traders should take advantage of downtrends in indices by purchasing put options and uptrends in big bank stocks by purchasing call options.
What Do You Think?
How do you think big bank stocks will react to a rate hike? Let us know your opinion in the comments below.
[Image Courtesy of The Wall Street Journal]