Should We Fear the Fed?
As reported recently in the WSJ (9/1/2014), "The question on everyone's mind is when the Federal Reserve will announce its first interest-rate hike. That event could come as soon as the Fed's next two-day policy committee meeting, which starts September 16th. The first actual rate hike almost certainly won't happen before March (2015), but it's the impending announcement that's likely to cause the sharper market reaction." The announcement or signaling by Fed Chair Janet Yellen of a policy change should include a contemplated plan and schedule for the beginning of monetary tightening, which when it does begin is most likely to be gradual. History suggests that even a plan of gradual tightening can upset the financial markets.
As Liz Ann Sonders, of Charles Schwab, wrote last month, "It is common to experience some volatility and initial pullbacks when moving toward the initial rate hike. In looking at the past five rate hike cycles, the average pullback - nearly always having concluded before the actual first hike - was less than 6%, therefore not even qualifying as a correction. It is important to note that "overall, the stock market fares pretty well in the six months before and after the initial hike." Her article referenced a study by BCA Research, Inc. that suggested that in the six months immediately following the initial rate hike the stock market climbed, on average, 10.6%.
That does not sound so bad. The Federal Reserve has been deliberate in setting a course for eventual interest rate normalization. Tapering of its monthly asset purchases should be completed this fall. With a dual mandate of job creation and healthy inflation, the Fed will probably take small, measured steps in tightening its monetary policy. While monthly nonfarm payroll data has shown improvement in 2014 (+215,000 new jobs per month), the Fed is looking deeper into job data with the hope and expectation of seeing ongoing improvement in wage growth, labor-force participation rates and the number of Americans on long term unemployment rolls.
Don't fear the Fed, when (not if) tightening occurs that should be affirmation that the domestic economy has recovered to the point where it is strong enough to withstand the shocks of external forces and pressures, like the geopolitical events that have become seemingly ever present this past year. For more information on this topic, please click on the link below:
http://finance.yahoo.com/news/good-news-about-jobs-could-finally-spur-fe...
