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Why the Fed ended a 7-year rate freeze this week

December 18th, 2015 by ,    photos by

It may be December, but the US Federal Reserve has started warming up interest rates

 
 
 

CNBC: Fed Raises Rates By 25 Basis Points, First Since 2006

The most discussed financial issue for many years finally saw action on Wednesday. The US Federal Reserve raised interest rates for the first time since 2006. The Fed raised the target funds rate up ¼ a percent to 0.25% - 0.5% from 0%- 0.25% (it is a range). The rate had been that low for the past seven years. Overall, the markets did expect it, but seeing as the rates had not risen in seven years, it created some volatility due to a number of unknowns. In the end, the markets finished up a fair amount on the day. The TSX climbed 246 points to close at 13,166. The Dow climbed 224 points to close at 17,749. This article is a long read but a good one as it details the list of factors that go into a rate decision and why this decision was made. Basically, the housing market and labour market in the US are continuing to improve, so the Federal Reserve felt the US economy was strong enough to get back to a more normal rate environment. The rate is not the one that consumers get charged on, say, a mortgage, but the consumer rates are calculated off of the target rate by banks so expect to see US loan and mortgage rates begin to climb higher.

CBC: Shaw Communications buying Wind Mobile in deal valued at $1.6 billion

Merger news in Canada’s telecom space was announced Wednesday of this week. Calgary-based Shaw Communications is buying Toronto-based Wind Mobile for $1.6 billion in a deal expected to close in the second half of 2016. Shaw has no mobile division currently and many had been speculating for a long time when it would happen and if Shaw would start its own. It has opted to purchase a well-known brand with almost a million customers across three provinces; Ontario, Alberta and BC. Wind Mobile has been around for six years, but is has not always been in the best shape financially. It had been openly looking for a buyer for a couple of years, causing many to speculate that the deal with Shaw has been in the works for a while. That the deal took time to agree on terms, and by terms, I mean the price. Wind did improve enough financially to raise over $400 million last week and it was likely the move that prompted Shaw to pay what Wind wanted, as Wind then had money to go it alone if they wanted.

CBC: Hudson's Bay Co. reportedly eyeing online retailer Gilt Groupe

If the rumours prove true, Canada’s large retailer, Hudson’s Bay could be the new owner of luxury online discounter Gilt. The Bay already owns US chain Saks 5th Avenue and this article points out the synergies between Saks’s” Off 5th” brand and Gilt. It is likely the two groups are talking, but what is very speculative is the price - $250 million. This would be a huge discount to the $1 billion Gilt was valued at four years ago in 2011. Online retailers were really hot for a while, but they have seen their growth stagnate and their valuations come back down to reality. Valuations get lofty when expectations become unrealistic and investors pay money not to miss out on a big opportunity. When the sky-high dreams deflate, investors are left basing valuations on actual sales and market demand. The price The Bay eventually pays for Gilt will likely be based on a calculation, not on a fear of missing out.

 

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