A Message On The Fed Rate Hike


Michael Conway discusses the Federal Reserve’s recent decision to raise interest rates for just the second time since the recession, and how investors should look ahead.


Transcript


As you probably heard the Federal Reserve recently raised interest rates for just the second time since Ben Bernanke lowered them to zero, near the bottom of the 2008 recession. The Fed is trying to normalize rates without hurting an economy that many say hasn’t yet found its footing. So experts have discussed the potential effects of such a move, and investors have waited to see how markets might react. Some experts were sure markets would tank.

Over the last few years markets have sometimes disliked good news about the economy, because that meant the Fed might raise rates and break up the party in equities. When the Fed raised rates at the end of last year markets immediately sold off with the S&P 500 losing more than 10% before the end of January. This year the market has so far taken the 25 basis point uptick in stride as more of a Y2K moment than a financial apocalypse. It’s a good sign to see that markets can finally stomach such a minor rate change, unlike it’s panic in late 2015.

This hopefully means were on the road to normalization where prices are based on positive economic signs rather than every little remark coming from the Fed. Some say Trump’s plan for lower corporate taxes, deregulation, and repatriation of assets continues to lift the market, distracting investors from the potential effects of higher interest rates on an unsteady economy. As always, there are many unknowns. Will Trump plans actually benefit the economy? How will the interest rate hike effect our long term growth? We all know investors won’t be short of theories trying to predict how every domino falls. We should always keep an eye on these changes as long as we also maintain a long term perspective.