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DEC
28
December Commentary: The Wait is Over!

It finally happened! On December 16th, for the first time in nearly a decade, the Federal Reserve raised interest in what represents a hesitant, but real, vote of confidence for the United States economy. The rise amounts to a small but significant move, with rates ticking up from zero to a range of 0.25 and 0.50 percent. This begins the process of closing the books on an era of easy money which helped our nation avoid further consequence of the Great Recession.

 

Truthfully, the move surprised no one. Short of actually tattooing the words on her forehead, Federal Reserve Board Chairwoman Janet Yellen did everything she could to let us know the move was coming. I would say she really did all of us a favor. The lack of surprise likely had a direct impact on the relative lack of response in the U.S. market. Sure, in the two trading days following the announcement, the S&P 500 went down to the tune of 3.3% (another predictable event), but it bounced right back, up 2.8% last week. For once, it appears that the 24-hour news cycle, social media and the like have made a positive impact on the financial markets by letting us know what was coming in advance.

 

As I said, this was a vote of confidence, but a hesitant one. For the first time since 2008, the markets might finish the year in the red. Despite those six straight years of rising stock markets, full recovery is not a term most economists would use to define these six years of investment gains. Oil prices are at their lowest since before the 2008 crash. China remains a source of tremendous ambiguity, having already factored into recessions in countries like Brazil and Canada. Inflation is flat, contributing to, among other things, the Social Security Administration pulling back the cost of living increase for the first time since 2010, and for only the third time since 1935.

 

With all of that, how can the Federal Reserve raise interest rates? Because despite all of the negative factors out there, the good outweighs the bad. It was 2008 when the Fed went all in to help the U.S. economy recover, by slashing its benchmark interest rate to zero. It was a historic move, meant to spur an economy that had an imploding Wall Street, a mortgage crisis, and an unemployment rate headed for double digits. Seven years later, unemployment has dropped by half, the economy has added jobs for 69 consecutive months (a record), the market has tripled since its low, and the pace of expansion has remained a respectable 2%. As Janet Yellen put it, "the fundamentals are strong."

 

So what does this rate increase actually mean for people like you and me? Honestly, probably not much. It means that the Federal Reserve no longer believes you live in a country in crisis and that fundamental recovery has really taken shape. It is probably the beginning of the end for historically low mortgage rates. It means we might actually start to see real benefit of keeping money in savings accounts and cds, unlike the past few years, when interest rates have been putrid at best. Other than that, the move is probably more symbolic than anything else.

While the Fed expressed confidence, it also demonstrated restraint. The truth is that we need higher interest rates and some inflation in order to achieve continued growth and a sense of stability. Make no mistake, the Fed knows that. While this was the first rate increase, we can expect more significant but gradual increases in the coming year. We need them, and at the very least, certainly need to understand if the economy is strong enough to sustain them.

One thing is for sure, by this time next year, we will know if Janet Yellen and the Federal Reserve Board gave us an early Christmas present, or left a lump of coal in our stockings.



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 Securities offered through American Portfolios Financial Services, Inc. Member FINRA/SIPC (FINRA/SIPC). American Portfolios Financial Services, Inc. and American Portfolios Advisors, Inc. are not affiliated with any other named business entities mentioned.

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