Get on with it already! Ever since the crash of 2008, the Federal Reserve has kept interest rates near zero. The theory was that low interest rates would stimulate economic activity. But we are now in the sixth year of economic recovery. The government tells us that unemployment is 5.1%. The average person buying bonds looking for income is treading water. After taxes, and inflation they are slowly losing purchasing power.
Raising rates from 1/8% to 3/8% should be a no-brainer. The much anticipated rate hike by the Fed, perhaps as early as tomorrow, has everyone quivering with anticipation. Our suggestion is to ignore the announcement. There is no secret trading strategy that tells how to “play” the Fed’s announcement.
Let’s say the Fed does indeed raise rates by 0.25% tomorrow. How would the market react? There could be a sell-off. On the other hand the market could rally on the belief that the Fed thinks the economy is finally strong enough to allow a modest increase in interest rates. In fact, both could happen: a sell off followed by a rally.
Should the Fed NOT raise rates this could be interpreted that the Fed sees dangers ahead for the economy.
Our own position is that raising rates by one-quarter of one percent will have no actual effects on American economic activity. The basis for economic growth comes from the private sector. It will come from new drugs to cure diseases, new apps to make your life easier, more technology to increase the supply of oil and natural gas. The cost of gasoline has dropped to under $2.00 in our area, which has a big effect on the budget of the average family. This, not a modest increase in interest rates, will have a bigger impact on the economy than anything the Fed does in the short term.
We have no idea what the Fed will decide and no one else does either. No matter what happens, short term gyrations in response to the Fed are just noise, distracting investors from the fundamentals. For those who believe in free markets and capitalism, what affects you and your portfolio happen far from Washington DC.