In early 2015, we see the Federal Reserve preparing to raise interest rates.
Well, they are trying to prepare Wall Street for the “raising of the rates.”
Quick story: When the kids were very young, one of our lads in particular would repeatedly fly into an epic meltdown when we announced it was “time to go home” from a party. Total outburst, every time. No matter what we said, he simply could not be consoled! He did NOT want the party to end.
As good parents, my wife and I hit the books looking for answers on how to better handle this in the future, and avoid these epic meltdowns. One of the best tips we picked up was to “announce our plans” to him well in advance, and then also remind the little monster of our intentions, as the time to go approached.
We would say, “in a little while, we are going to start packing up our things and get ready to go.”
Ten minutes later, we’d tell him “Soon, we are going to put our coats on. And then we’re going to ride home in the car.” And then about five minutes later, we would tell him we will “soon put on our coats, and pack up the toys, and it will be time to go.”
And five minutes later? Viola! It worked! No more meltdowns.
In a way, that “epic meltdown” is much like what we see today on Wall Street. “Why would the Federal Reserve want to raise interest rates now?” they shriek and howl! When Bernanke even hinted at “tapering” bond purchases in May 2013, markets immediately sold off ten percent.
Federal Reserve Plans To Raise Interest Rates
The Fed has kept interest rates at (or near) zero since 2008. The last time the Fed actually RAISED interest rates was in 2006, nearly ten years ago. The head of a Wall Street trading desk pointed out (recently) half of the traders in his group have yet to go through a time when the Fed was raising rates!
That’s interesting. Look at what Janet Yellen has been doing lately. As we approached the end of Quantitative Easing III, (the bond purchases), it was widely communicated. And the market reacted with a little bump down in October 2014, but nothing drastic.
For months, Yellen and other members of the Federal Reserve have been telegraphing their plans and intentions regarding when rates may begin to rise. The Federal Reserve preparing to raise interest rates now should come as no surprise.
Yellen has clearly stated the Fed will be sensitive to “how markets react” when they raise interest rates, before plowing ahead with more rate increases. This is important – and was echoed by Federal Reserve Vice Chairman Stanley Fischer just last week at an annual monetary policy conference sponsored by the University of Chicago Booth School of Business.
I bring this up because we have now begun to hear an interesting message from the Fed: we may not HAVE to raise interest rates at every meeting.
In past interest rate cycles, the Federal Reserve would raise interest rates every few months. Typically, once the Fed begins raising rates, it is hard for them to stop! In fact, as Vice Chairman of the Federal Reserve Vice Chairman Stanley Fischer noted from 2004 through 2006, the Fed raised rates at every single meeting: 17 times in a row!
By the way, while the Federal Reserve was raising rates at every meeting, the stock market made market cycle highs in 2004, 2005, 2006, and even a year later in 2007.
But it is possible we could see the Fed raise rates once this year, take a few months off, raise once or twice the year after and keep interest rates lower for longer. Possible.
No matter the outcome, Yellen and the Federal Reserve are doing an excellent job communicating their intentions well ahead of time, to avoid epic meltdowns. Sound familiar?