I’ve been saying for months now that the Federal Open Market Committee’s (FOMC) rate hike back in December would be a one and done deal. And today, the FOMC proved me right. At approximately 2:00 PM EST, they revealed that they decided not to raise rates during this month’s meeting.
Instead, they’re keeping the target for the benchmark federal funds rate at between 0.25% and 0.5%. Policymakers are still expecting to raise rates twice more this year, but even that’s down from the previously estimated four increases.
As to be expected, U.S. markets reacted well to this news. While the benchmark indices trended lower shortly before the announcement, they dramatically reversed course after the FOMC revealed it was keeping key interest rates unchanged. As you know, in the absence of higher yields elsewhere, the stock market is especially attractive in a low interest rate environment.
However, I certainly wasn’t the only one calling for rates to say the same. As I pointed out yesterday, the European Union and Japan are resorting to extraordinary measures to shore up their respective economies. Both Europe and Japan have moved into the crazy world of negative interest rates, and these negative rates are simple, “hail Mary” attempts to shore up those struggling economies.
Now, even though the United States has its own economic factors and internal markets to worry about, that doesn’t mean we’re completely immune to these external economic forces, not by a long shot, and the Fed’s decision today clearly reflects that reality.
As uncertain as the global economy appears to be today, domestic gains in the U.S. labor market and housing sector aren’t enough to pressure the Fed into reversing their current stance. Although, overall U.S. markets reacting positively to these recent economic numbers, there’s still too much financial fear on a global scale right now for the Fed to significantly try to cool America’s own economic growth.
A cooling here in the United States could potentially throw world markets into complete havoc by exacerbating the deflationary "black hole" currently impacting financial markets.
So by the end of the year, the Fed expects rates to be at 0.875%. That’s a modest increase, but over the next two years the Fed expects to return rates to more normal levels. By the end of 2017, they’re expecting rates to be at 1.875%. Then, by the end of 2018, those rates are expected to be back up to 3%. Now, these might sound like significant increases, but they’re all reductions from earlier expectations.
The bottom line is that December’s rate hike looks like it was simply the one and done deal I predicted earlier, and we likely won’t see significant rate increases for some time. In the meantime, now is an excellent time to be a stock picker. In tomorrow’s blog I’ll feature some of my top picks for the low interest rate environment.