In mid-December, the Federal Reserve announced the first rate hike in nearly 10 years.
Here are four things to keep in mind.
It’s important to keep in mind the context of today’s action. Historically, the first Fed hikes have not precipitated economic or market downturns. Typically, the first rate increase has been a signal that the economy has gained traction, and on average, asset markets have typically performed relatively well in the year or two after the first hike.
This round of rates hikes is starting as the Fed faces a far weaker backdrop for global growth—as well as much lower inflation—than is typical for the first rate hike in a cycle. This would seem to imply the Fed will move forward at a gradual pace of tightening. This weaker global and inflation environment makes a dramatic spike in interest rates less likely.
It is important to keep in mind that Fed monetary tightening does tighten global dollar liquidity as well. Because the dollar is the world’s reserve currency, this tighter liquidity has made it more difficult for many asset prices in recent months—including emerging-market equities, non-U.S. currencies, and commodity prices. These markets may remain volatile in the aftermath of the Fed’s first hike.
Finally, our outlook is that the global economy will digest the Fed hike over the coming months. The rate increase may even boost confidence in the U.S. economy by reassuring us all that we are finally on a path to normalization. And with the U.S. still in a steady mid-cycle expansion, we expect the global economy to stabilize over the course of 2016. Markets are likely to be choppy, but overall I think the outlook for equities should be relatively favorable as the year unfolds.
https://www.fidelity.com/viewpoints/market-and-economic-insights/fed-raises-rate?ccsource=email_weekly
| 1. | The first rate hike usually indicates economic improvement, not an imminent market downturn. |
It’s important to keep in mind the context of today’s action. Historically, the first Fed hikes have not precipitated economic or market downturns. Typically, the first rate increase has been a signal that the economy has gained traction, and on average, asset markets have typically performed relatively well in the year or two after the first hike.
| 2. | This round of rate hikes may be gradual. |
This round of rates hikes is starting as the Fed faces a far weaker backdrop for global growth—as well as much lower inflation—than is typical for the first rate hike in a cycle. This would seem to imply the Fed will move forward at a gradual pace of tightening. This weaker global and inflation environment makes a dramatic spike in interest rates less likely.
| 3. | Higher rates could pressure commodities and emerging markets. |
It is important to keep in mind that Fed monetary tightening does tighten global dollar liquidity as well. Because the dollar is the world’s reserve currency, this tighter liquidity has made it more difficult for many asset prices in recent months—including emerging-market equities, non-U.S. currencies, and commodity prices. These markets may remain volatile in the aftermath of the Fed’s first hike.
| 4. | The economy could stabilize. |
Finally, our outlook is that the global economy will digest the Fed hike over the coming months. The rate increase may even boost confidence in the U.S. economy by reassuring us all that we are finally on a path to normalization. And with the U.S. still in a steady mid-cycle expansion, we expect the global economy to stabilize over the course of 2016. Markets are likely to be choppy, but overall I think the outlook for equities should be relatively favorable as the year unfolds.
https://www.fidelity.com/viewpoints/market-and-economic-insights/fed-raises-rate?ccsource=email_weekly
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