The Federal Reserve today elected to raise the target Fed Funds rate.
Posted: December 16, 2015
As was largely anticipated, the Federal Reserve today elected to raise the target Fed Funds rate by 0.25 percent, to a range of 0.25 percent to 0.50 percent. This is the first increase in the target Fed Funds rate since 2006 and ends an extraordinary 8-year period during which the rate was held at a near-zero level. The decision to raise was unanimous and removes much of the uncertainty plaguing markets regarding when the Fed would initiate the rate hike process.
The question now becomes — how rapidly will rates rise from here? That is a difficult question to answer, but the statement issued by the Fed today indicated that future rate hikes would be “gradual” and will be dependent on key economic data meeting the Fed’s expectations. Importantly, the Fed’s preferred measure of inflation remains below the desired level of 2 percent, so the pace of hikes will be subject to an increase in this measure. We believe this is good news for investors in that it removes the likelihood of rapid and aggressive rate hikes that could derail the current economic expansion and create additional volatility for the financial markets.
Please note that rising interest rates, both short-term and long-term, are normal at this point in an economic cycle. The economy has been in expansion since mid-2009 and no longer requires emergency monetary policy to support it. We believe that the onset of a gradual and cautious rate hike cycle is good news for investors and do not expect the Fed Funds rate to reach more than 2.0 percent to 3.0 percent in this cycle, a level that could take up to three years to attain.
Looking ahead, we believe the U.S. and global economies will continue to grow, but at a slower pace than seen during previous economic expansions. In addition, the heightened market volatility experienced over the past few months is likely to continue for the foreseeable future. As a result, a diversified portfolio, holding equities and fixed income, both domestic and foreign, remains appropriate for long-term investors. In addition, because the rate hike was largely already reflected in both stock and bond prices, we do not anticipate any meaningful moves in the markets as a result of today’s Fed action.
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