Fed raise rates what does that mean for stock market

[street]

Just wondering what effect will raising interest rates effect the mutual fund/stock market future?

[audreyh1]

It was already anticipated, the markets new exactly what the Fed was going to do. No surprises.

The bond markets rallied big time in the morning because inflation came in weaker than expected. They don't think the Fed is going to be able to raise rates much more because economic data seems to be weaker lately. The stock market hasn't reacted that much to the weaker economic data. Or maybe as long as interest rates stay low they will ignore the details and party.

The Fed admitted that inflation is below target and likely to remain so for the near future. But they didn't change their rate raising projection.

The Fed also disclosed specific details of their planned great balance sheet unwind which they still say will start this year - most assume that means December. Markets don't seem to have reacted to this yet. I suspect they don't believe the Fed will get around to starting the process this year.

[street]

audreyh1 >>>> that was explained very well. I thank you for the insight.

I did mean Fed in the title but I couldn't edit the title.

Thanks

[Koolau]

Quote:

Originally Posted by audreyh1 <SNIP> The Fed also disclosed specific details of their planned great balance sheet unwind which they still say will start this year - most assume that means December. Markets don't seem to have reacted to this yet. I suspect they don't believe the Fed will get around to starting the process this year.

Is there a good tutorial of what the "great balance sheet unwind" IS, how it's done, possible ramifications for investments, inflation, who is most likely to be helped/harmed, etc.? Thanks for any help understanding this.

[LRDave]

Quote:

Originally Posted by Koolau Is there a good tutorial of what the "great balance sheet unwind" IS, how it's done, possible ramifications for investments, inflation, who is most likely to be helped/harmed, etc.? Thanks for any help understanding this.

From what I read, this balance sheet unwinding is as much unexplored territory as QE was originally. So who knows?

Whether QE was even a net positive is still debated by some. (Not me: I think QE allowed the financial markets negotiate some pretty rocky shores without running aground completely - MHO.)

[audreyh1]

Quote:

Originally Posted by Koolau Is there a good tutorial of what the "great balance sheet unwind" IS, how it's done, possible ramifications for investments, inflation, who is most likely to be helped/harmed, etc.? Thanks for any help understanding this.

This article goes into the plan details of lowering the Fed balance sheet from $4.5 trillion to $2-2.5 trillion over about 4 years. This balance sheet was built up by the Fed buying Treasuries and mortgage and Agency debt during the various quantitative easing that occurred through 2014. You would expect this to put pressure on interest rates as a buyer shrinks its portfolio.
Interest rates addressed at Fed meeting with Janet Yellen

Even though the Fed has been talking about starting this process since March, and now the plan details and timeline have been released, I have read very little speculation about how this might impact various markets. It could be that few investors believe the Fed is really going to do this unwind, or that think it will get put off due to weaker economic conditions.

[audreyh1]

Quote:

Originally Posted by LRDave Whether QE was even a net positive is still debated by some. (Not me: I think QE allowed the financial markets negotiate some pretty rocky shores without running aground completely - MHO.)

Me too. The main downside has been stock markets higher than they perhaps should be, so perhaps more pain to come as they finally "normalize". Still probably better than running aground a few years ago.

[gcgang]

Don't fight the Fed.

[jetpack]

So, the Fed has now raised rates 1%... yet both short and long term banking interest rates for consumer are still stagnant. When are we going to see a rise in CD rates?

[foxfirev5]

Short term CD rates have risen, longer term such 5 year have actually dropped a little. Meaning maybe the long term outlook for rates may be in question.

[audreyh1]

Quote:

Originally Posted by jetpack So, the Fed has now raised rates 1%... yet both short and long term banking interest rates for consumer are still stagnant. When are we going to see a rise in CD rates?

High yield savings accounts rate have increased a little recently, but they also didn't go down as far as the Fed did.

[Koolau]

Quote:

Originally Posted by audreyh1 This article goes into the plan details of lowering the Fed balance sheet from $4.5 trillion to $2-2.5 trillion over about 4 years. This balance sheet was built up by the Fed buying Treasuries and mortgage and Agency debt during the various quantitative easing that occurred through 2014. You would expect this to put pressure on interest rates as a buyer shrinks its portfolio. Interest rates addressed at Fed meeting with Janet Yellen Even though the Fed has been talking about starting this process since March, and now the plan details and timeline have been released, I have read very little speculation about how this might impact various markets. It could be that few investors believe the Fed is really going to do this unwind, or that think it will get put off due to weaker economic conditions.

Thanks! That is somewhat helpful. I never really understood the QE's, so unwinding them will probably be even more difficult to understand. Still, it's a place to start. I will be very interested to see what folks anticipate the ramifications for us FIRE'd types will be. Stock prices seem like a possible casualty. I hope never to have a mortgage again - didn't even plan the last one but had to work it that way rather than sell old first and then buy new. That was a real "pleasure" back in late '09/'10!

I guess the only way to proceed in any case is to stay diversified and be ready to invoke one of my many back-up plans if need be. YMMV

[Totoro]

Unwinding as I understand it: you just stop buying new bonds, and as the old ones expire your balance sheet shrinks.

QE for extreme dummies: You buy bonds in the open market. The Federal Reserve issues IOUs to the sellers of those bonds. Because they are the Federal Reserve, these IOUs are actually called USD.

Net intended effect = you make more dollars, and increase demand for bonds. So inflation goes up, bond interest goes down.

[Free bird]

Bond market is not concerned with inflation. If the fed keeps raising simply to show they can without any good reason I don't think the stock matket will like a watered down punch once sobriety kicks in.

[Free bird]

But hey they're coming out from deep in the hole so they still have time to decide if they'll hit the rocks hard or just beach the boat.

[Koolau]

Quote:

Originally Posted by Totoro Unwinding as I understand it: you just stop buying new bonds, and as the old ones expire your balance sheet shrinks. QE for extreme dummies: You buy bonds in the open market. The Federal Reserve issues IOUs to the sellers of those bonds. Because they are the Federal Reserve, these IOUs are actually called USD. Net intended effect = you make more dollars, and increase demand for bonds. So inflation goes up, bond interest goes down.

Thanks, that helps a lot. Guess I'm the dummy. YMMV

[audreyh1]

Quote:

Originally Posted by Free bird Bond market is not concerned with inflation. If the fed keeps raising simply to show they can without any good reason I don't think the stock matket will like a watered down punch once sobriety kicks in.

That's a great analogy!!!

[mathjak107]

historically the last 45 years except for 1994 the bond market likes when the fed raises short term rates .

every time the fed pushed rates up by more than 1% in a year the bond market did well because that squelches inflation .

stocks have also responded well to slow increases in short term rates . it is only when the fed raises them to fast that the markets have sold off .

[street]

Thanks for the great information.