On Wednesday the Federal Reserve finally raised interest rates for the first time since 2006. Will they be one and done?
Here’s how the financial markets responded:
The stock market had a one-day rally before resuming its decline.
On the other hand, the bond market has clearly signaled that it believes the Fed made a mistake. The 10 year bond yield actually fell on the news.
So what’s the deal with this Fed rate hike?
The bottom line is that Central Bankers around the world (after over 600 rates cuts) still have not found a way to create economic growth. The Federal Reserve raising interest rates into an economic slowdown really had nothing to do with helping American families. Let me be very clear: the move was specifically designed to help the Big Banks and brokerages like Federated Investors. If you remember, when money market account rates went to zero, those firms waived their fees so that the money market accounts wouldn’t have negative interest rates.
This move by the Fed doesn’t increase the interest rates that investors in money markets earn, but it allows the brokerages to earn their fees. It won’t cause big banks to loan out more money to businesses; it will allow the banks to earn more than they have by loaning it back to the Federal Reserve at a higher rate.
So this Fed rate hike doesn’t (won’t) help the broader economy. Here’s what we’re seeing across the board:
- Global economic growth continues to slow.
- US Growth continues to slow. (The Fed calls the data transitory but it is pervasive)
- Raising interest rates in a slowing economy will only cause it to slow faster.
- As the economy slows, sales and profits at companies will go down.
- When earnings and profits at companies go down, their stock price will do the same.
- US Treasury Bonds continue to be one of the few types of investments that can hold and increase value in this environment.
Not an environment conducive to Fed rate hikes… or further hikes. Thanks for reading.
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