Another hike in the federal funds rate on Wednesday appears all-but-certain. Experts, prediction markets, and Fed officials themselves all indicate that the central bank is ready to raise target rates 25 basis points to a range of 0.75%-1.00%.
Amidst all the clamor of another rate hike, the stock market is responding, yet again, with a hearty ¯_(ツ)_/¯. It’s been over 100 days since the market experienced a 1% drop, and the S&P 500 is up 18% since the first Fed rate hike in December 2015. Strong corporate profits and the hopes of a more expansionary fiscal policy are driving the market, and the Fed is behind the curve.
Investors agonizing over the Fed should focus their efforts elsewhere. Instead of guessing where interest rates will go, read some of the thousands of annual 10-K reports that have come out in the past month. Finding red flags and hidden expenses in the footnotes is a much more profitable activity than listening to pundits argue about Janet Yellen for hours on end.
Fundamentals Are Driving This Market
First off, it’s worth noting that the Fed has never truly controlled interest rates. There are plenty of historical examples where the Fed tried to push rates in one direction while long-term interest rates moved the opposite way.
More importantly, the Fed itself says rates won’t rise that much. From the minutes of the last FOMC meeting:
“The neutral real rate—defined as the real interest rate that is neither expansionary nor contractionary when the economy is operating at or near its potential—was currently quite low and was likely to rise only slowly over time.”
Even the Fed acknowledges that low-interest rates are the new normal, and it’s hard to argue with that assertion. It took eight years of near-zero rates for inflation to even come close to the Fed’s 2% target, and technological innovation should continue to slow the rate of inflation even as interest rates stay low.
