After much anticipation, the Federal Reserve finally did it—they raised the Federal Funds target rate for the first time since 2006.
Instead of a static target which many economists were expecting, say 0.25% for example, the Fed opted instead to aim for a range of 0.25% to 0.50%. This will provide them with some “extra rope” to play with as the market responds to the initial rate increase.
So what does this mean for the average investor? In the short-term we expect some volatility as investor sentiment adjusts to a new environment. Over the long-term, rising rates have historically been a positive for markets. Stocks have actually risen 12 out of the last 14 times the Fed has risen rates.
Keep in mind, rates would not be rising if Janet Yellen, the Chairwoman of the Federal Reserve, and her team did not believe the economy was ready. Economic data here in the U.S. is strong and has been in line with projections. And, they made it clear that this will be a gradual tightening cycle.
Mohamed El-Erian, chief economic advisor at Allianz, said “The Fed is going out of its way to assure markets that, by embarking on a ‘gradual’ path, this will not be your traditional interest rate cycle. Instead it will be one remembered as an unusually loose tightening.” In other words, they are allowing the market to take baby steps and ease into a new interest rate environment.
If you are curious about the relationship interest rates play with pension plans, you can read more about that in another post, here: How Interest Rates Impact Pension Lump Sum Values.