When the Fed Speaks…

There’s been a lot of talk about interest rates lately. The chairwoman of the Fed, Janet Yellen, has said that there needs to be some serious talks about this in the near future, but as of yet, they have not happened. If and when they do, there will be some serious changes in the U.S. economy. Right now, predictions say that this will likely happen in mid-2015.

The big question is: how does this affect traders? And, of course, the follow up: what can they do about it?

Let’s look at each question one at a time.

The job market is getting stronger. It’s way better than it was three years ago, and back to where it was around 2008. That’s good news, but there’s still room for improvement. Hiking up interest rates needs to wait until then, just because more jobs equals a stronger economy, and that means that the government can profit more when rates are up. But rates won’t just go up there.

Other lenders will follow suit, and they will go up across the board. Banks and other private lenders will raise their rates, too, and that means the costs of doing business will go up. It’s natural, and it happens in a cyclical nature in the economy, but it also means there will be a temporary shellshock when it happens. It drives long term growth, but a lot of the time, it drives asset prices down for the short term. Unless you are taking short positions, traders are in a place where this will negatively affect them for a bit.

The second question was kind of already answered. You need to start looking at short positions. Not everywhere, but in many assets, this will be the best approach. Traditionals short selling is extremely expensive and carries a lot of risk within the stock market. But in binary options, that risk is miniscule since it doesn’t trade the asset directly, the timeframes are short, and the amount of cash risked at one time is small. Binaries provide a little sort of shield from the dangers of the market because of these things, but they still allow you to make big profits at the same time.

There are obviously a lot of other factors being looked at besides employment by the Fed. Central bank bond purchases are key, as is locking in a goal inflation rate of 2 percent. However, these things are happening quickly, and are on pace to happen soon.

The big thing to consider is the long term, of course, and it should act as a positive force for strengthening businesses even more so than they already are. But, traders look to short term growth, and there are two ways in which this will have an impact. The announcement was made after market hours over a weekend, so there may be a small tremor on Monday morning. That’s normal because it’s a big announcement, but it won’t likely have a big impact the following day. It’s still months away from happening, and any changes that result from this will be purely psychological kneejerk type responses. This is fine, but prepare for it. However, when rates do actually change, there will be another short term change, this time, a little longer (think a few weeks), and much bigger.

If you are expecting these things, you can do your research and see how your markets and assets of choice respond, and then act accordingly. Some types of traders will be more heavily impacted than others, and it is very asset dependent. A case by case analysis will help you a lot, and knowing that it can happen should be the catalyst for getting you ready and able to profit from it.