fbpx

Extent of Fed hike will affect stocks, credit and confidence

The Federal Reserve’s Federal Open Market Committee did not raise interest rates in September – not a surprise given that the presidential and congressional elections inevitably cause uncertainty in the markets.

The Federal Reserve’s Federal Open Market Committee did not raise interest rates in September – not a surprise given that the presidential and congressional elections inevitably cause uncertainty in the markets.

Despite maintaining the status quo in September, there is a great deal of consensus that the Fed will raise interest rates at its December meeting.

In 1977, the Federal Reserve’s objectives of “maximum employment, stable prices and moderate long-term interest rates” were established. In practice, the mandate is more dual in nature. The Fed is asked to facilitate economic growth while simultaneously controlling inflation.

To fulfill this mandate, then, it is believed by most that interest rates will be raised modestly in December, in a measured way.

Interest rates can and should go up. The question should not be when the Fed will raise rates but rather by how much.

While there have been wage pressures in the U.S. economy, inflation, as measured by the Consumer Price Index, is running right about at the Federal Reserve’s target. If that remains between now and December, the Fed likely will raise rates only slightly, which would not have a significant negative impact upon risk assets.

Another reason the Fed wants to raise rates is to unwind its own balance sheet.

During the unprecedented quantitative easing programs, the Fed bought trillions of dollars of securities (treasuries and mortgage-backed securities), swelling its balance sheet.

There is great concern about what would happen when the Fed started to sell those assets, but, in the end, it opted to hold those securities to maturity.

Once interest rates have normalized, the Fed likely will stop reinvesting the interest in its mortgage-backed securities portfolio and instead will collect interest in cash – thus unwinding the balance sheet.

Business Journal Events

Diversity and Inclusion Summit

Wednesday, September 16, 2020
Diversity and Inclusion Summit

The Future of Higher Ed Summit

Tuesday, September 29, 2020
The Future of Higher Ed Summit

Reader Rankings Awards

Wednesday, October 07, 2020
Reader Rankings Awards

2020 Fastest Growing Companies Awards

Wednesday, October 14, 2020
2020 Fastest Growing Companies Awards