Interest Rates, Janet Yellen, and The Bard

What did the Fed just do?

Narrowly considered, the Fed simply changed the wording in their periodic statement, announcing that the range for inter-bank interest rates—Fed Funds—would go from zero to .25% to .25% to .5%. In other words, the rate will move from “essentially zero” to “almost zero.” Practically, if a bank borrows $1mm from another bank overnight, they’ll have to pay $13.89 rather than $6.94. You could almost call this the “Macbeth” interest rate move: full of sound and fury, signifying—nothing.

But it’s not really nothing. Rate increases are like potato chips: the Fed can’t do just one. They’ve started to raise rates 12 times since World War II. In 11 of those 12 times, they’ve kept going until the economy tanked. That’s why Chair Yellen was at pains to emphasize the moderate pace of rate increases she and the Committee expect to take. Between the official statement, her opening remarks, and the subsequent Q&A session, Yellen used the world “gradual” or “gradually” at least 10 times. Message sent.

And it appears that the message was received. Normally, the stock market falls when the Fed raises rates. But this time stocks rallied: the Dow rose over 200 points; the S&P and Nasdaq went up 1.5%; stocks in Europe and Asia rose over 2%. Even bonds did well. After some volatility, the 10-year US Treasury note now yields roughly what it did three days ago, and less than it did a month ago.

What’s next? It all depends on the economy. If we continue to live in a slow-growth, low-inflation world, nothing much will change. Consumers will keep spending, companies will keep hiring, markets will expand. But it never works out that way. Something unexpected will come along that shocks us. How efficiently our economy adjusts, how resilient we are—to borrow another line from Shakespeare—that is the question.

Douglas R. Tengdin, CFA

Chief Investment Officer

By | 2017-07-17T12:22:19+00:00 December 17th, 2015|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. –
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