Interest Rates can’t stay near zero forever. Here are five things you should know about the interest rate hike:
1) It is coming December 16th – nothing is guaranteed, but all indications are this is a done deal. The short-term interest rate futures are pricing in an 85% probability of a rate hike.
2) Data dependency highlights improvement in the market measures used to determine when the time is right. Obviously, the jobless rate has long been below the threshold for pulling the trigger, but that itself is not enough. An increase in average hourly wages demonstrates a reduction in labor slack that has concerned the Fed. And finally, inflation may not have reached objectives, but that pressure lies mainly in depressed energy prices much lower than historical norms.
3) Real Estate and Auto industries will be minimally impacted. A rate hike of ¼ of one percent from ZERO is more symbolism than anything else. Free money is ending with the cost still remaining historically very cheap. The decision-making process buying a home or a car is driven by finances, not rates.
4) Dollar Divergence – The US has had the strongest currency as others have engaged in a race to the bottom. Higher rates often mean an appreciating currency but this talked about and telegraphed rate event may see a muted reaction. The multi-year Dollar rally illustrates forward thinking possibly pricing in the eventuality of raising rates.
5) The December hike is priced in. Exhaustive discussions have occurred for years about when the time is right and that time is right now. The stock market has had ample time to digest this tiny tick up in rates.
It is time to talk about March as the date of future increases now becomes the next issue of intrigue. The speed of the next step up is what investors will focus on now that the first hike is history.
