The Federal Open Market Committee voted 10-0 in favor of the rate hike.
It also raised the discount rate by a quarter-point to 1.0%.1
Addressing the media after the FOMC announcement, Federal Reserve chair
Janet Yellen shared the central bank’s viewpoint: “With the economy performing well, and expected to continue to do
so, the committee judged that a modest increase in the federal funds rate
target is now appropriate, recognizing that even after this increase, monetary
policy remains accommodative.”2
Equities started the day with minor
gains, then advanced further. The Dow
Jones Industrial Average, S&P 500, and Nasdaq Composite respectively
advanced 1.28%, 1.45%, and 1.52% Wednesday.
The yield on the 2-year Treasury hit a 5-year high of 1.021%. Gold rose $15.20
to close at $1,076.80 on the COMEX.3,4
As a December rate increase was widely expected, the real curiosity concerned
the following press conference. Would Janet Yellen offer any hints about
monetary policy in 2016?
She offered one: she said she doubted that any interest rate hikes in
2016 would be “equally spaced.” Aside from that remark, no new insights
emerged; Yellen reemphasized that the Fed does not plan to raise rates
aggressively.2
Investors gained more insight from the Fed’s latest dot-plot chart,
which expresses the Federal Open Market Committee’s opinion on where the
benchmark interest rate will be at near-term intervals. The new dot-plot
forecasts four rate hikes during 2016, with the federal funds rate climbing
toward 1.5% by the end of next year (the median projection is 1.4%).5
The dot-plot revealed benchmark interest rate targets of 2.4% for the
end of 2017 and 3.3% for the end of 2018, slightly lower than the previously
stated targets of 2.6% and 3.4%.5
That corresponds with the consensus of analysts surveyed by CNBC. Their
expectation was for three quarter-point rate hikes across 2016, taking the
federal funds rate toward 1%.6
Some analysts wonder if the next rate hike might occur at the FOMC’s
March meeting. Nothing could be gleaned about that from Yellen’s press
conference or the new FOMC announcement.6
With more tightening seemingly ahead,
what is in store for the bull market? Bears
may want to wait before making any gloomy pronouncements. While rising interest
rates are commonly assumed to impede a bull market, this is not always the
case. In fact, the S&P 500 advanced 15% during the last round of tightening
(2004-06).7
Could higher interest
rates decrease inflation pressure?
That is a distinct possibility, and that would hurt wage growth and business
growth. The Fed would like to see inflation in the vicinity of 2%, yet the
Consumer Price Index is up only 0.5% in the past 12 months, held in check by a
14.7% annualized retreat in energy prices and a 24.1% annualized fall in gas
prices. On the other hand, the Core CPI (minus food and energy prices) is up
2.0% in the past year.6
The Fed may have made just the right
move at the right time. If it had
waited until 2016 to tighten, a collective “uh-oh” might have been heard from
pundits and analysts, with comments along the lines of “Does the Fed know
something about the economy that we do not?”
As JPMorgan Private Bank
chief U.S. investment strategist Kate Moore told CNNMoney this week, “Keeping
interest rates at zero is enforcing the idea that the U.S. economy is fragile.”
Years of easing certainly helped the bull market, though: Wednesday
morning, the S&P 500 was 202% above its March 9, 2009 bear market low.2,7
Ultimately, the central bank felt the
time had come for tightening. At
Wednesday’s press conference, Yellen commented that data had led the Fed to
raise rates – it had not made its move in response to any shifts in public
opinion. “Consumers are in much healthier financial condition” than they once
were, she remarked. The rate hike certainly expresses confidence in the
economy, which could strengthen further in 2016.2
This material was prepared by MarketingPro,
Inc., and does not necessarily represent the views of the presenting party, nor
their affiliates. This information has been derived from sources believed to be
accurate. Please note - investing involves risk, and past performance is no
guarantee of future results. The publisher is not engaged in rendering legal,
accounting or other professional services. If assistance is needed, the reader
is advised to engage the services of a competent professional. This information
should not be construed as investment, tax or legal advice and may not be
relied on for the purpose of avoiding any Federal tax penalty. This is neither
a solicitation nor recommendation to purchase or sell any investment or
insurance product or service, and should not be relied upon as such. All
indices are unmanaged and are not illustrative of any particular investment.
12182015-WR-1489
Citations.
1 - marketwatch.com/story/federal-reserve-lifts-interest-rates-for-first-time-since-2006-2015-12-16
[12/16/15]
2 -
blogs.marketwatch.com/capitolreport/2015/12/16/live-blog-and-video-of-the-fed-interest-rate-decision-and-janet-yellen-press-conference/
[12/16/15]
3 - cnbc.com/2015/12/16/us-markets-fed.html
[12/16/15]
4 - reuters.com/article/usa-bonds-idUSL1N1452HC20151216
[12/16/15]
5 - marketwatch.com/story/federal-reserve-dot-plot-still-signals-4-interest-rate-hikes-in-2016-2015-12-16
[12/16/15]
6 - latimes.com/business/la-fi-federal-reserve-rate-hike-20151216-story.html
[12/16/15]
7 - money.cnn.com/2015/12/15/investing/stocks-markets-fed-rate-hike/
[12/15/15]