After a brutal recession and a painfully slow recovery, the U.S. economy no longer needs emergency measures of support from the U.S. Federal Reserve. Policymakers began the process of normalizing monetary policy at the end of 2015, and although the Fed is raising rates because the economy is healthier, the prospect of higher interest rates has created consternation and angst among some investors.
While the Fed’s own projections are for a slow and gradual rate hike cycle, futures pricing suggests that the market thinks interetst rate hikes may be a bit slower. Although the gap between the Fed’s projections and the market’s view has narrowed, there is still room for surprises and volatility. The key thing to watch will be how market expectations adjust to the Fed’s new forecasts, as a Fed that hikes more quickly than the market expects could lead to upward pressure on the U.S. dollar and a de facto tightening for the U.S. economy.
Read the entire commentary here.
In Brief:
- Rate hikes are not a reason to abandon equities. Investors, however, should prepare for volatility as the Fed initially hikes rates.
- Fixed income investors can expect the short end of the yield curve to rise as the Fed normalizes policy, but longer-dated bond yields should remain low due to continued demand for duration and easy monetary policy abroad.
- Investors should remember that the Fed is only considering rate hikes because the economy is healthier than it was in the aftermath of the crisis. Overall, this is a good thing.
Review the full commentary from JP Morgan, read their thoughts on global reflation, or learn how rising interest rates may affect your portfolio.
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