Fed and Interest Rates (20th Dec 2018)
The Fed decided to hike its benchmark overnight lending rate by one quarter point on Wednesday to a target range between 2.25 to 2.5 percent. The Fed did however trim its 2019 outlook for rate hikes to just two increases from three previously. The US market reacted negatively to the move, as it was not as accommodative as investors’ had wanted it to be. Fed Chairman Jerome Powell lifted hopes late last month by saying that interest rates were close to ‘neutral level’, which suggested that the end of rate hikes was near.
We note that over the last 30 years, the Fed has effectively stopped hiking six times (including two “one and done” hikes in 1997 and 2015). Investors who bought stocks on the open of the month following the rate pause, and held for six months, they would see average returns of 12.5% (range -7.44% to +26.9%), with only one negative instance.