Earlier this morning it was confirmed that the US Federal Reserve raised interest rates by 0.25% to between 2% to 2.25% target range.
Many investors were expecting this, it was no surprise. Indeed, several more interest rate rises are expected over the next couple of years.
However, the US Fed expects another rate hike in December this year, three more during 2019 and one more increase in 2020. If all of these increases happen the US rate would be above 3%.
In a broader sense rising interest rates in the US is expected to affect the value of growth shares like Appen Ltd (ASX: APX) and defensive shares such as Transurban Group (ASX: TCL).
However, I'm sure every homeowner has recently experienced out-of-cycle interest hikes from banks including Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ), Bendigo and Adelaide Bank Ltd (ASX: BEN), Bank of Queensland Limited (ASX: BOQ) and Suncorp Group Ltd (ASX: SUN).
You may remember that National Australia Bank Ltd (ASX: NAB) recently decided not to raise its interest rate to 'build trust'.
My worry is that with each US Fed hike there will be a somewhat smaller hike on Australian mortgages from our local banks because some of their funding comes from overseas sources.
The recent hike alone is causing households grief – think what another two years of hikes could do? Of course, banks may change their funding mix or absorb some of the costs. It may not be that bad. But the RBA is likely to increase rates too at some point.
What this says to me is that Australian households are in a tight spot and bank shares are not the place to be in my opinion. I just think there are better investment opportunities out there for us investors willing to look at smaller businesses.
