Tags: Discount | brokers | rate | hike

USA Today: Discount Brokers Will Likely Thrive on Fed Rate Hike

By    |   Thursday, 14 May 2015 10:00 AM

The Federal Reserve is highly unlikely to raise interest rates before September and possibly not before next year. But eventually it will act.

In general, that's not a good thing for stocks, which have enjoyed a tasty six-year bull market thanks largely to the Fed's low-rate policy.

But some stocks can benefit from rate hikes.

"A group of companies, namely the discount brokers like Charles Schwab (Ticker: SCHW), E-Trade (ETFC) and TD Ameritrade (AMTD), actually stand to win when interest rates move higher, because much of their business is tied to collecting interest on cash that’s highly sensitive to short-term rates," writes Matt Krantz of USA Today.

That conclusion is based on the paper's analysis of data from S&P Capital IQ and RBC Capital Markets.

Some Internet brokers earn more from collecting interest on un-invested cash in investors' accounts than from trading commissions.

"Investors anticipating rising interest rates ought to consider discount brokers," RBC analyst Bulent Ozcan wrote in a report obtained by USA Today.

Elsewhere on the Fed front, you can add Microsoft co-founder Bill Gates to the list of those who warn that near-zero interest rates around the globe spark grave potential danger.

"The environment with low interest rates—it's globally so unusual. It really shouldn't persist," he told CNBC. "It creates problems in terms of leverage and bubbles."

The Federal Reserve has kept its federal funds rate target at a record low of zero to 0.25 percent since December 2008. Some experts think that has already created bubbles in some financial markets, including stocks. The S&P 500 index has tripled over the past six years.

But exiting low rates isn't so easy, Gates notes. "How do we get out of it without creating some economic setback? It would be very difficult," he said.

While the Fed debates when to begin raising rates, many central banks overseas are keeping theirs down. "People do expect the U.S. to sort of take the lead in pushing our way out of this situation," Gates said.

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The Federal Reserve is highly unlikely to raise interest rates before September and possibly not before next year. But eventually it will act.
Discount, brokers, rate, hike
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2015-00-14
Thursday, 14 May 2015 10:00 AM
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