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Post-Rate-Hike (Scenarios/History)

Post-Rate-Hike (Scenarios/History)

A possible Liftoff-action may take place on 16th Dec. 2015. That’s when the Federal Open Market Committee, the Fed policy-making group that sets the target rate, concludes its next two-day meeting.
S&P 500 after 1st rate hikes (history)Chart data source: Strategas Research Partners

Janet L. Yellen, the Fed chairwoman, is scheduled to hold a news conference that afternoon. It is interesting to know, that US-Markets, in the chart above represented by the broad S&P 500, tend to move higher within the next 12 months following an interest-move (as can be seen by the average-performance after the last 6 initial rate-hiking-cycle-starts). 

(But if policy makers take no action then, the next meeting dates are on Jan. 26-27, 2016 and March 15-16, 2016)

Following historical developments/how markets reacted to prior tightening cycles can give a better understanding of how the markets can play such an event: “Investors have started to wonder what life will be like when monetary policy isn’t seen as the primary tool to wash away the sins of the world,” noted Jason Trennert of Strategas Research Partners in a client note (in Summer 2015).

The takeaway from the chart: “Initial Fed rate increases are usually the result of a strengthening economy and are, as such, dealt by investors with equanimity if not outright enthusiasm,” Trennert explained.

But there are two caveats: the first is that after the third rate hike investors start to worry that the Fed will need to raise rates faster, creating fresh worries about the “end of the economic expansion,” Trennert said.

The second caveat is perhaps more worrisome: “The bad news is that history may be totally irrelevant after a period in which short rates have remained so low for so long,” Trennert warned. (Short-term rates have been pegged around 0% since December 2008).

As expected by Trennert and now to be felt: “far more market volatility will accompany the initial stages of Fed tightening this time."

original article-source (June 2015)/slightly adapted: