Waas expects that the Fed will continue to raise rates until a recession begins.
“Looking back at the last 18 recessions going back to 1915, the Fed is going to tighten until they break something,” says Waas. “This Fed is tightening in an environment where, on any other occasion, they would be loosening.”
The Fed may be preparing for the next recession, raising rates now so that it can create more monetary stimulus when the economy begins to shrink.
“They’re doing this for reasons that are non-economic,” says Waas. “They want to put some arrows in their quiver to cut rates when we do finally experience another recession.”
In the short term, the increase is likely to have little impact—most market participants had anticipated Wednesday’s vote despite the mixed numbers. Spot polls from SIFMA and CNBC ahead of the announcement showed the majority of industry professionals predicting an increase and the market had priced in a more than 95 percent probability of a hike.
Fixed-income markets, which have been more sensitive to recent economic data, may shrug off the rate increase, says Eitelman.
A small rate increase is unlikely to threaten credit, Eitelman says, as most holders of long-term debt should be unaffected, and most debtors overall are able to weather incremental rate hikes.
In Tuesday comments, DoubleLine founder Jeff Gundlach opined that high yield bonds were still probably safe, but that investors should be wary of monetary policy’s impacts.
“With high-yield bonds, it’s OK to dance, but make sure you dance near the door,” Gundlach said.
The Fed’s decision comes amidst low levels of volatility across most asset classes, said Gundlach, arguing that further rate increases this year could but pressure on equity markets.