The Fed Turns The World Today But Very Slowly And Gently

The Fed did what was expected and, as Ayn Rand would have it, Atlas shrugged. We have certainly had enough time to prepare both in the physical investing world and the emotional investing world. The federal funds rate rose from zero to 0.25%.

American equities popped after the announcement that the Federal Reserve was raising interest rates for the first time since 2006. (Rates have either been going down or stationary since that long ago year.)

The Dow, S&P 500 and the NASDAQ all rose, as of 3:30 PM in New York, between 1.10% and 1.25%.

More importantly, since last performing such a contortion in September, the Fed lowered its projection of where rates most likely will be in the next few years.

The FOMC forecast an “appropriate rate” of 1.375 percent at the end of 2016, the same as September, implying four quarter-point increases in the target range next year, based on the median number from 17 officials. However, 2017 (2.375%) and 2018 (3.25%) will be modestly shy of previous prognostications. Eventually, in the “longer run,” rates will hit 3.50%.

[ If you would like to read the entire press release regarding the historic rate move by the U.S. Federal Reserve, please go here. ]

Another salient feature of the Fed statement contains a reference to the balance sheet it maintains. Remember the wild days of U.S. quantitative easing? Those purchases are still on the books and will remain so “until normalization of the level of the federal funds rate is well under way.” That might mean late in 2017, we think, before the Fed sheds those weak assets.

One of the overlooked changes that the rate hikes should bring us is – perhaps counter-intuitively – looser credit. Why? As rates rise, bank rates to consumers rise, meaning that more profit can be made on less solid loans and credit lines.

We might not feel that effect immediately but it should certainly begin to help those with less than triple-A credit ratings (especially the young).

Of course, it also means that those with variable rate mortgages or credit card balances will be paying more.

All and all, though, the rise in rates should be good for consumers looking to borrow.

The U.S. dollar is barely on the plus side today, which is not surprising as some of the contracts floating around on the euro/dollar go-round will probably stay pat right till the end of this year.

Gold stayed surprisingly firm, its only loss factor coming from the slightly stronger greenback. Otherwise, so-called normal trading pushed gold and the entire precious metals complex higher.

Indeed, silver is almost 3.00% higher, while platinum is up 2.25%.

The positive movement of the precious metals is indicative of traders’ approval of the slower pace of future rate rises.

Finally, we come to crude oil. Oh my, my. West Texas Intermediate fell almost 5.00% at settlement, although now is slightly recovered in afternoon trading. Brent North Sea is down about 3.30%.

Although it’s common knowledge, we note today, on the heels of the rate rise, that oil’s troubles are unrelated to broader economic trends and are the result of a now bizarre-seeming set of actions by the Saudis.

Wishing you as always, good trading,