Rising Interest Rates: What Does it Mean?
If you have been paying attention to market news at all, you'll recall that yesterday the Chairman of the Federal Reserve (Janet Yellen) announced that the U.S. Federal Reserve raised the target range for its federal funds by 25 basis points rate to 0.5% to 0.75%, during its December 2016 meeting. Policymakers said that the labor market has continued to strengthen and that economic activity has been expanding at a moderate pace since mid-year. Inflation is expected to rise to 2.0% over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. The decision was unanimous and widely expected, though that didn't stop the stock market from getting uppity.
The stock market dipped at the start of Janet Yellen's speech, but ultimately bounced back following the announcement that interest rates will increase as planned. Ultimately, rising interest rates is not necessarily a bad sign -- when they are manageable, it means that the economy is stable and multiple factors are going strong, like the labor market and manageable inflation projections.
Rising interest rates mean that home equity loans, bank loans, and mortgage rates will increase slightly but nothing off-the-wall yet. It will also mean that savings accounts and money market accounts will start paying YOU a higher interest rate on your savings. But these items are not anything that get investors excited, so why is the market hanging on so strong?
Many are chalking up Trump's impending presidency as being the savior of the market, but this logic concerns me a bit. Mostly because people are developing this mentality that Trump is the "savior of the market" -- a dangerous assumption and ALL assumptions of this magnitude are dangerous. Once the future looks clearer, we can all celebrate the rally, but until that happens, be VERY wary of the marketplace. I expected a rally, but not a rally this strong. It's a crazy, crazy market.