It was a decision that shocked no one -- not even the markets.
On Thursday the Federal Open Market Committee of the Federal Reserve announced that it was raising the federal funds interest rate one-fourth of a percent, a move anticipated by many investment managers.
“This was one of the most simultaneously anticipated, yet expected, rate-hike announcements ever,” says Brett Wander, CIO of fixed income for San Francisco-based Charles Schwab Investment Management. “In the grand scheme of things, it would have been shocking if they didn’t raise rates.”
This is the first time the Federal Reserve has increased interest rates in nearly a decade, but investors were prepared, says James Ragan, director of Seattle-based D.A. Davidson’s individual investor group, who was watching for the raise since the end of quantitative easing policies in 2014.
“It doesn’t change our views on the markets because the rate increase has hung over the market for all of 2015,” Ragan says. “Now we have it, and I’m not sure our outlook is going to change from here. There will still be ongoing discussion of when the next hike will be, the economic data will be tightly scrutinized and we’ll be listening for hints in the Fed’s statements. In general, the economy can support the rate hike and we remain positive on equities for 2016."
The Fed, unanimous in its decision, stated that the increase was motivated by recent positive jobs numbers and a desire to move closer to an inflation target of 2 percent.
But Steve Wood, chief market strategist for Russell Investments, says the move was more likely motivated by a desire to get into positive interest rate territory.
“From a policy meaure, they wanted to get here, and now they’ve achieved what they term lift-off,” Wood says. “To call it tightening would be flambouyant, it’s not tightening, this is a baby step on the path towards normalization.”
The announcement comes after months of preparing markets and investors for rising rates, and was accompanied by a cautious tone from Fed Chairman Janet Yellen.
“She’s very cognizant of how fragile the economy is, though it is improving,” Wander says. “The single worst-case scenario for Yellen is that the Fed finds itself having to reverse course and ends up undoing the rate hike.”
According to the Fed, household spending and business fixed investment increased and the housing sector improved over the latter half of 2015, offsetting concerns about declining exports amid the stronger dollar.
Next year, the Fed anticipates that unemployment will fall to 4.7 percent and that the economy will grow 2.4 percent, but board members didn’t expect to hit their inflation target in the near term.