(Chinese Version)3 Reasons Why Fed Interest Rate Increase Will Not Matter
There has been an immense amount of buzz surrounding the eminent increase of interest rates by the Fed. While many economists and financial analysts are forecasting and preparing for what the higher rates may bring, others are under the belief that the increase does not matter. Since this increase is due sometime this year, we want to take a closer look at why it will not matter when the Fed decides to carry out the increased interest rate.
A Look at History
When looking back on the last seven years, you’ll notice that the Fed hasn’t increased its rates since 2006. Moving forward a couple of years to 2008, the Fed cut interest rates in order to float the drowning economy, and because of that, we have been experiencing rates that were historically low.
Despite what some are saying, this increase should not be viewed in a negative light. Anyone who decides to look at the historical data will find no correlation between higher rates and unfavorable effects on the stock market. In fact, according to a study conducted by University of Navarra’s professor of finance Javier Estrada, there was NO historical relationship found between interest rates and stock market performance.
Now don’t be mistaken, this by no means ensures the continual rise of the stock market. What this research does do, is suggest that any negative effects on the stock market would be for reasons other than high interest rates in and of themselves.
Nowhere to Go but Up
Being that rates have been unprecedentedly low, there really is no place for them to move but up. A large factor in the eventual increase is to ease inflation as we see economic growth, meaning that in order to remain balanced in the long-term, steady increase is necessary.
There is a lot of risk involved with rapid growth, and this increase of interest rates addresses those risks. Although there is no telling of exactly what is in store for the economy and the housing market, this solution should effectively slow down any boom in house prices that occurs.
The Big Picture
According to Federal Reserve chairwoman, Janet Yellen, “Sometimes too much attention is placed on the timing of the first increase in the federal funds rate, and what should matter to market participants is the entire trajectory, the entire expected trajectory of policy.”
By this she means that tomorrow’s expectations are not as important as expectations for the next several years. The fact that interest rates are expected to increase is a sign that the FED trusts that the economy is stabilizing long term. In the meantime, financial analysts will continue to remain busy obsessing over the FED, but that doesn’t mean that you have to as well.