Fed message: Path of rate hikes to be gradual
It’s the pace of interest rate hikes that investors should be focusing on, not the timing of the first increase in nearly a decade. And the pace of the rate-hike cycle will be executed “gradually.”
That was the message the U.S. central bank sent to Wall Street on Wednesday in the release of the minutes of its October policy meeting. In the minutes, the Fed said it “well may be appropriate” to start to raise interest rates — the federal funds rate currently is pegged at a historic low of around 0% — and boost rates up back to more normal levels. Rates are still at emergency low levels in the wake of the 2008 financial crisis as the Fed has seen the need to keep borrowing rates low to stimulate the slow economic rebound.
“The expected path of the federal funds rate, rather than the exact timing of the initial increase, was most important in influencing financial conditions,” the Fed said in the minutes.
Wall Street’s interpretation is that the Fed will be patient and deliberate in the process of normalizing rates and moving them off 0%, says Alan Skrainka, chief investment officer at Cornerstone Wealth Management.
A big reason for the stock market’s positive reaction Wednesday after the release of the Fed minutes (the Dow surged more than 240 points) is that the Fed reiterated that the pace of rate hikes will be “gradual,” a comment investors interpreted as the Fed leaving borrowing rates at very low levels for a long period of time.
“The policy trajectory after liftoff will (likely) be shallow,” Skrainka said.