Interest rates have been on a downward path for almost thirty years. In May of last year, thanks to the Fed’s taper talk, that direction has reversed. This week it was revealed that some Fed officials are actually discussing when to hike interest rates.
The discussion took place late last month during the Federal Open Market Committee Meeting presided over by the new Fed chairwoman, Janet Yellen. Like her predecessor, Ben Bernanke, Yellen appears in no hurry to raise short term interest rates and has told the markets as much. Most investors, guided by past Federal Reserve comments, are not expecting a hike in interest rates until the middle of next year at the earliest.
So why discuss it at all? Actually, for me, any discussion of raising rates is a fairly strong indicator that both employment and the economy are continuing to gain momentum and are expected to do so in the future. That needs to happen in order to justify the present levels of the stock market and any further advances equities may make.
I am sure that the same dissenting Fed members who, for years, have opposed further stimulus by the FOMC majority are behind this talk of hiking rates. These are the “inflation hawks” and if they had their way, the Fed’s gradual tapering of stimulus would be accelerated from its present $10 billion a month decline to something more meaningful.
But moving the discussion from fewer stimuli to raising rates is a quantum leap in monetary policy. I do not believe anyone at the Fed is seriously entertaining a hike in short term rates before the middle of next year.
In the meantime, over in the stock market a bit of profit-taking has kept the markets from achieving their objective. Recent highs are within sight. The S&P 500 Index actually came within 2.5 points of that target on Wednesday (and five points on Friday) before falling back. I would expect more of this kind of action before we reach and then break those highs.
Nevertheless, a new high will happen in the weeks ahead, but it does not mean that sunny skies lie ahead. There are storm clouds forming. Record highs will be met by more profit-taking, which will create more declines similar to the one we experienced in January. This year, as I have written in the past, will not be like 2013. There will be more volatility and more declines, although by the end of the year the markets will be higher than they are now.
So far, I see little to fret about. Investor sentiment has returned to a more reasonable level. The economic data, despite the weather effects, continues to show improvement. The technical charts indicate we are still in a bull market so what is the worst that could happen here? At the worst, we may see another sell off and establish a new trading range once we hit a new high. We could meander up and down for a few months. That would not be unusual since stock markets go sideways over 60% of the time. If that is what the future holds, I’ll take it and be satisfied to simply buy and hold.