The Top of Matt’s Wish List: The Fed Rate Hike was quickly memorialized in these T-shirts by Quartz.
The above headline comes from University of Michigan Economist Justin Wolfers. Much news coverage will be dedicated to the Fed’s first rate hike since 2006. However, we should keep three things in mind:
- The Rate Hike was highly anticipated:
- The Federal Reserve has done an excellent job communicating its plans; nobody should have been surprised by Wednesday’s actions
- After seven years of near-zero interest rates, some people were relieved about the move towards a more normal interest rate, and to finally have “lift off” in the rearview mirror
- The Rate Hike was very small:
- Their target rate moved from a range of 0 – 0.25% to 0.25 – 0.50%
- Borrowing costs are still extremely low, but if the eventual minor change in rates charged on credit card balances or mortgages is a make-or-break scenario, you probably shouldn’t be borrowing the money in the first place
- The Rate Hike was made because they view the economy as healthy:
- Fed Chairman Janet Yellen mentioned, “The economy has clearly come a long way” and is, “performing well and expected to continue doing so”
- With unemployment near estimates for the long term natural rate, edging the Fed Funds Rate towards more normal levels seems reasonable
What does it mean for Investors?
Remember that markets are always forward looking. The Fed action Wednesday had been well-telegraphed, communicated and priced into the market for quite some time. What the market wanted to react to Wednesday was any information on the pace of future rate hikes.
Fed Chairman Janet Yellen was measured, as always, with her comments about future hikes being data dependent. Markets generally reacted favorably to the announcement, with the S&P 500 rising 1.5%, the yield on the 10-year Treasury ticking up a mere 2 basis points and the value of the dollar remaining basically flat. This is what you call a generally pleased — and relieved — financial market.
Looking forward, the Fed forecast for rates at the end of 2016 indicated a median of 1.25 – 1.50%, indicating the expectation that the Fed would continue to raise rates next year by a total of 1%, or essentially a quarter point increase each quarter in 2016. However, a contrarian indicator in the same report shows that the predicted central tendency for inflation would not hit the Fed target of 2% per year until 2018.
Without any fixed path for future rate hikes, is there anything investors should be doing today? Not according to recent research from Fidelity, which found that the stock market rose on average by double digits in the 12 months following an initial Fed rate hike. Investors in shorter term, higher quality fixed income investments may also see reduced impacts from small interest rate increases like this, relative to longer term or lower credit quality bonds.
While we won’t know what the these next 12 months will hold for market returns, we can say that historically, a Fed rate hike hasn’t been reason enough to make drastic changes to your risk profile. As the title mentions, by all measures the Fed is still acting in a highly accommodative fashion — just slightly less so than Tuesday.
Source: Yahoo! Finance. Indexes are unmanaged baskets of securities that are not available for direct investment by investors. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. All investments involve risk, including loss of principal.
Justin Wolfers Tweet: https://twitter.com/justinwolfers/status/677216994480037888?refsrc=email&s=11