First of all, I think we’re all a little sick of hearing whether the Fed will raise rates this month – or whether they should’ve done it sooner. We’re talking about 0.25% if they do it!
After seven years of zero interest rate policies, economists should be much more worried about the damage done from speculative bubbles and mal-investments created from such rates.
But the reason the markets could have a larger response to a hike is that they’re not used to a one-and-done, which is what I see happening.
Instead, they’ve witnessed the Fed going in one direction or the other for significant periods of time. So they assume that once they start hiking, they’ll continue to do so for years, even if very slowly.
But I don’t see that happening here.
If the Fed finally does raise rates, a whopping 0.25%, I predict that will be the last rate hike for a long time. And with worsening demographic trends here and around the world (especially in Europe), I don’t see much of a debate on the matter.
Just think – Japan’s fallen back into recession after the strongest QE ever.
Meanwhile, Europe is languishing, China and emerging countries continue to slow, and retail sales are weakening in the U.S.
Top it off with escalating geopolitical events and tensions – even a possible stock correction just ahead – and there’s a chance the Fed may hold off at the last minute.
But for now, the markets are largely convinced a hike will happen…
So let’s just cover our bases: what will that look like if it occurs?
For starters, I think stocks would react favorably just a little, but only at first. In the short-term, it would be a sign that the Fed felt confident in the economy enough to finally raise rates.
And for bonds, it would only be a negative for prices as yields would naturally start inching up.
But that’s just the beginning…
