Federal interest rate hike means economy ‘sufficiently strong’ to absorb it

Rather, the best place to put your money in the New Year will still probably be USA equity markets, particularly multinationals with global exposure that are well hedged against currency and political risk, the US dollar, which will probably rise, and USA bonds.

“There are some pretty widely varying views on whether the Fed is ahead or behind the curve and whether inflation is going to pick up very quickly”, said Michael Hanson, senior economist at Bank of America in NY.

While interest rate hikes typically cool the economy down, and are seen as a negative for stock prices, some experts believe that the reaction after the Fed meeting could be unconventional.

For starters, Chair Janet Yellen and her band of banking buddies certainly missed other, more ideal times to begin raising rates earlier this year, when the markets were far more liquid and not up against the holidays and year’s end. Goldman also forecasts that in the coming months, core personal consumption expenditures, the Fed’s preferred measure of inflation, would rise year-on-year, as the drop in healthcare prices from a year ago is removed from the calculation.

Most important, the two policy experts reported, for the Fed’s dual mandate of balancing of maximum employment and stable price inflation, wage growth just isn’t accelerating. The US central bank, often considered the world’s most influential, has held rates at their emergency lows of 0pc to 0.25pc since late 2008.

Fund managers expect the Fed will request the US Treasury to issue more debt for its holdings in the form of “add-ons” at the Treasury’s monthly auctions, which are additional sales of debt only made to the Fed. At this juncture, it seems that several market participants are expecting the rate hike to be in this range.

Fed policymakers in recent months have emphasized that they will likely lift the rate gently, in part because of lingering headwinds to growth, such as weakness overseas and tight credit.

But as rate hikes add up, it will become a double-edged sword.

More than three-quarters of J.D. Powers’ survey respondents said they were aware rates might go up.

Since that rally, utility stocks weakened as expectations for a December rate hike grew.

“If they raise every other meeting,
0.25 percent, that’s slow”. We’re not so sure-and we think moving to the sidelines now is a bad idea.

Hasenstab said stronger economic fundamentals should make countries like South Korea, Mexico and Malaysia resilient but that weaker Turkey and South Africa, both of which have hefty current account deficits, could be more negatively affected.

A top BoE official then warned investors against reading too much into the Bank’s projections based on market estimates.

As of September, members of the Fed’s Open Market Committee collectively were predicting a Fed funds rate of 1.1 to 2.1 percent by the end of 2016, up from near zero today. Conversely if the Fed is raising rates to “cool down” an overheated economy, stocks tend to go down before rebounding. That will certainly mark a major milestone for the US economy.

“There is less momentum now behind these sector moves than there has been in the past three or four years”, said Brian Reynolds, chief market strategist at New Albion Partners in NY.