US Target Federal Funds Rate data by YCharts Conclusion ![]() Though the S&P 500 has grown quite fast despite the high number of hikes of these past 1.5 years, there were mounting concerns that the pace and level of hikes had begun to reach a point where they may begin to constrict the market. Comparatively, this speed of rate hikes has been quite aggressive. However, in 2017 there were three whole rate hikes for 75 basis points, with another one this year already and 2-3 more expected. With almost a decade of zero interest rates prior, the first rate hike in December 2015 nonetheless saw over an entire year, until December 2016, for another 25 basis point hike. The Federal Reserve has been relatively aggressive in recent years in hiking rates. Nonetheless, if the Federal Reserve's policy does indeed change to be less aggressive now that it has hit its inflation target, that may mean markets will have less monetary headwinds to worry about in the upcoming future.įurthermore, because markets have already priced in 3-4 rate hikes in 2018 and another 3-4 in 2019, for the Federal Reserve to slow down its policy would cause a market shift towards equities that may provide a sudden fundamental tailwind boost. There have been great worries in the market that a continued aggressive Federal Reserve monetary tightening, combined with the sudden market headwinds from oil and tariffs, could put a quick end to the Goldilocks economy for markets and the economy's trajectory as a whole. While the S&P 500 is still up 14.28% year-on-year, it had already reached its current level of about 2,780 back 5 months ago in mid-January 2018. We are now far off from that, as in recent months the tariff battles and oil prices have sent the market into a period of stagnation, with the S&P 500 still up only 3.94% YTD. The economy has been growing at just the right 2-3% level to support moderate gains without overflowing inflation, leading the S&P 500 to rise over 19.42% in the 2017 calendar year amid historically low volatility. (Source: Federal Reserve Board of Governors ) Are The Days of Easy Money, And Easy Growth, Over?Ģ017 was a true Goldilocks economy, featuring low inflation, market-friendly monetary policy, and leading to a prosperous economy amid a consistently growing and unvolatile market. In comparison, in November 2016 it was at $4.218 trillion and in November 2015 it was at $4.240 trillion. It also may signal a slowdown in the Federal Reserve's contractionary unloading of its balance sheet, currently still at $4.189 trillion in assets held outright. (Source: Federal Reserve Bank of New York )įurthermore, it may be an inflection point in the pace of Federal Reserve rate hikes, which have been rather fast in the past two years. On Wednesday, the Federal Reserve is widely expected to raise the Federal Funds target rate 25 basis points to the 1.75% to 2.00% range.Īmid a still red-hot economy and now hitting the Federal Reserve's inflation match, this rate hike is slightly more significant in that it ends the hyper-cheat cost of borrowing money by matching the roughly 2% inflation we've seen these past 1.5 years. Another Federal Reserve Rate Hike, But Perhaps This One's A Little Different If the Federal Reserve's policy does shift, as it seems it might, it could provide a significant boost to the market at a time when it is otherwise stuck in gridlock between major tailwinds and headwinds. Combined with the effect of the tariff wars and oil's volatility, this has held the market back in recent months despite strong fundamental earnings growth expectations. ![]() However, the Federal Reserve's monetary policy had begun to create concerns, particularly as it reached its inflation target, of being too aggressive. The market has been able to shake off the effect of aggressive rate hikes over the past 1.5 years amid strong earnings and economic growth and an overall "Goldilocks economy." The potential easing of Federal Reserve rate hike and balance sheet offloading policy couldn't come at a more opportune time for the United States domestic equities market as a whole ( SPY).
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