“The Fed Raised Rates a Quarter Point … Merry Christmas.”
Ty J. Young Editorial
The Federal Reserve raised interest rates a quarter point last week on December 16, 2015. Markets dropped significantly the week before and again saw a huge -367 Dow drop on Friday, December 18. The move to increase interest rates seemed to be priced by the market, and other factors – not the rate hike – seemed to cause the noticeable volatility (oil, Asia, others).
Is this an early Christmas gift? In many respects, yes. There is short-term pain, but long-term gain with starting to return interest rates to normal market conditions as opposed to serving the political interest of easy money and an artificially inflated stock market. So yes – you benefit from a free market in assessing stock value, not a government-controlled market that sets the rate based upon government policies.
I. Short-Term Pains of a Fed Rate Hike:
- Cost of doing business increases: Loans, insurance, credit cards and real estate market will all see a bump up in costs related to interest and financing. Therefore, your daily costs and your budget will take a hit.
- Economic growth stifled: Growth, which is already slow, will slow further.
- Stock market could suffer: Economists, such as Robert Schiller, have indicated that markets are overpriced by as much as 30%. The linchpin of the historic market move upward since the collapse in 2009 has been cheap and easy money. The ZIRP (Zero Interest Rate Policy) has driven investors into the market in search of yield. Although a quarter point bump in interest rates will have minimal effect long term, it does send a market signal that things are changing in Fed Policy, and that could have a negative effect on stocks.
II. Long-Term Gains of a Fed Rate Hike:
- Strengthens dollar: Strong-dollar policy is a Reagan-styled strong America policy. Raising rates helps the dollar gain strength through market conditions – a natural, not artificial, increase in dollar strength.
- Inflation slowed: We have clearly had inflation over the last several years in 2 areas which affect people the most – food and housing. For that reason, raising the rates can help tamper those soaring costs.
- Savers earn more: The Fed raising interest rates will likely have a positive effect on bank savings, CD’s and other bank accounts which rely upon a healthy interest rate environment to grow in value.
- Stock prices legitimized: A healthy stock market depends on market pricing that accurately and legitimately reflects value. When you have zero-percent interest rates, you have investment decisions that do not reflect the reasonable market value of a particular stock. Your portfolio is strengthened when rates reflect the market and are not set by policy makers.
Despite the potential for causing short-term pain to U.S. consumers, the long-term policies which will have the greatest positive effect for your portfolio can simply be stated.
- Interest rates need to be driven by market conditions.
- Those market conditions will legitimize the pricing of your investments.
- That, in turn, helps maintain a healthy economy.
The Fed is finally taking small steps in the right direction. Call now to find out ways to take advantage of the rising interest rate environment and protect yourself from potential market losses by using our principal protection investment strategy. 877-912-1919