#FedDecision – We Finally Took Off

chart01History will certainly remember this date for years to come. After much speculation, the Federal Reserve has decided to raise short-term interest rates. The target range rose from 0-0.25 percent to 0.25-0.50 percent. We finally took off.

chart02Earlier this month Janet Yellen had provided clear indications that the Fed was ready to take the first step. In fact, her speech at the Economic Club of Washington on December 2, 2015 paved the way for the increase.

The market received the message, and yesterday was calm. The VIX, which measures the volatility of the S&P 500, peaked last Friday; however, it has since decreased. Not to worry, it was nothing like the late August 2015 figures.

chart04So what comes next? The question will shift from ‘when’ the Fed starts increasing rates to ‘how much and how fast’ the hikes occur. It is unlikely that we will see rate increases at consecutive meetings; however, some experts predict that the Fed could raise rates 3-4 times in 2016.

Yellen appears content with the employment figures despite the decrease in labor participation rate. On the other hand, she has emphasized several times that inflation has been below the two percent target. Both the drop in oil prices and appreciation of the dollar has contained inflationary forces. Nonetheless, Yellen appears confident that these drivers are transitory, and prices will begin to rise towards the target during the year of 2016.

chart03The following is a list of items that we may be expecting from the Fed.

  • They will keep a slow and incremental pace for additional rate hikes.
  • Most recently hikes lasted for approximately a year, with the exception of 2004-2006, which lasted for two years. Expect this to last even longer.
  • If the Fed’s were to target the average 3-4 percent interest rate, rising in increments of 0.25 percent four times a year, it would take approximately three years to reach the goal. The last hikes did surpass the five percent mark.
  • A major international or nation hiccup may halt the hike.
  • The hike may be stalled by a softer than expected inflation rate in 2016.
  • REIT stocks may still perform well, regardless of the increase. The MSCI US REIT Index (NYSE:^RMZ) performed positively during the 2004-2006 hike.

chart05

Some excerpts from the press release:

“The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will continue to expand at a moderate pace and labor market indicators will continue to strengthen.”

“The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”

“In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal.”

Source: Federal Reserve

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

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