On Rising Interest Rates

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By Charles Schwab

What They Could Mean for You

The FMOC rose interest rates today.

So, what does this mean for all of us?

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Assessment

Be aware that although the FED does indeed control overnight and short-term IRs; it is the market-place that controls longer-term rates. So, don’t fret.

-Dr. David Edward Marcinko MBA

Conclusion

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OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

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2 Responses

  1. The FOMC Decision

    Federal Reserve policymakers raised the federal funds rate by 0.25 basis point to a range between 0.50% and 0.75% at their December 13–14 meeting. This is the first time this year—and only the second time in more than a decade—the Fed has increased short-term rates.

    The Fed’s decision, which was widely expected, reaffirms its confidence in the strength of the U.S. economy, which is in the midst of one of its longest expansions. The labor market is essentially at full employment, and inflation is on track to reaching the Fed’s 2% target.

    Based on its statement after its last meeting, and its latest projections, the Fed plans a “gradual” increase in rates over the next couple of years. It expects three quarter-percentage-point rate increases in 2017 and three each in 2018 and 2019 before the rate levels off at a long-run “normal” 3.0%.

    So, I’m encouraged by the Fed’s decision to begin the process of normalizing rates, which have been near zero since 2009. Some economists expect the federal funds rate to increase to 1.5% by the end of 2017, but remain below 2% through at least 2018. This is in line with the Fed’s pursuit of “dovish” tightening.

    Fed rate increases could bring short-term pain to bond investors (bond prices fall as rates rise). But, higher rates can benefit long-term investors. By reinvesting earned income at higher rates, investors can help offset bond price declines with higher income returns.

    Regardless of the direction of interest rates, it’s prudent for investors to maintain a diversified portfolio with an asset allocation consistent with their long-term goals, risk tolerance, and time horizon.

    Dr. David E. Marcinko MBA

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  2. FOMC

    As expected, the Federal Open Market Committee raised the target range for the federal funds rate to 0.50%-0.75%. This is an increase of 0.25% — the first such increase since last December. In its press release, the Committee cited continued strengthening of the labor market and expanding economic activity as reasons for increasing the federal funds rate. The Committee noted that job gains are solid and the unemployment rate has declined. Household spending has been rising moderately, but business fixed investment has remained soft.

    While inflation has increased since earlier in the year, it remains below the Committee’s 2.0% longer-run objective, partly reflecting earlier declines in energy prices and in the prices of non-energy imports. FOMC forecasts project three rate increases in 2017, with the median federal funds rate anticipated to be 1.4% by the end of 2017, 2.1% by the end of 2018, and 2.9% by the end of 2019.

    Ultimately, as Chair Janet Yellen noted, “In making our policy decisions, we will continue — as always — to assess economic conditions relative to our objectives of maximum employment and 2 percent inflation. As I have noted on previous occasions, policy is not on a pre-set course.”

    Michael Green
    [TGA Capital Management]
    A Registered Investment Advisory

    Like

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