As expected the Fed hiked the federal funds rate in their policy announcement following yesterday’s meeting. This was expected – I mentioned the near certainty back on November 21 – and already priced-in throughout the market. But, of course, you’ll probably see plenty of overreaction and beard-scratching pontification.
Ignore all that.
They hiked rates by a quarter of one point to the overnight federal funds rate of 0.50%-0.75%. They also hiked another key rate – the discount rate, which is the rate the Fed charges to commercial banks to borrow – by a quarter point.
Since November, when I brought this up, little has changed. There were no big surprises from the few important economic reports I mentioned. The only real surprise to me – and to a lot of folks – has been the endless rise in the stock market.
The Dow is near 20,000 and the S&P 500 is near 2,300, both record highs. Even though higher rates usually put a damper on stock prices, the market actually moved higher after the Fed announcement.
And that’s despite the rise in interest rates over the past couple months!
Trump hasn’t even been sworn in to office and yet, the markets are acting like he’s actually done something!
Markets are reacting because they feel he will loosen regulations and add fiscal stimulus, like infrastructure projects… at some point in the future.
Ahead of yesterday’s meeting there was some very important economic data released. The bad news was that November retail sales disappointed, only rising 0.2% on the month with autos and gas excluded. The market was expecting sales to be up 0.3%.
On the inflation front, the November Producer Price Index moved sharply higher, from up 1.6% on the year last month to up 1.8% year over year. Producer price movement tends to precede consumer price movement which is what the Fed is most concerned with.
So, the retail sales that drive inflation were a slight disappointment while wholesale inflation moved higher and in agreement with the Fed rate hike.
Following last December’s rate hike, the Fed estimated they would hike four times this year. We all know what happened with that!
The Feds estimate for 2017 changed to three rate hikes from two just last September.
The stock market reacted with a 10% sell-off early this year because of the Fed’s action and estimates for future hikes. If we see reason for another hike anytime soon, we will likely see an even bigger sell-off than we did earlier this year!
Of course, Harry has been predicting this for some time now.
The bond markets have correctly priced in today’s rate hike but what does the market think about three future rate hikes? The federal funds futures market has at least two rate hikes fully priced in already (August and December of 2017)!
The Fed discussed a strengthening labor market, a moderate increase in consumer spending, and increasing inflation as reasons for yesterday’s rate hike. They did note that business investment remains low.
Now that opinion can and will change as time goes on and as we get updated economic data and a better feel for what the new administration will actually accomplish down the road.
So what can you do to prepare for rising rates and a falling stock market?
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