FED Moves to Raise Rates .25% as Expected

Highlights of this Week’s Update:

1. Please note our Office and Market hours this coming Christmas week.
2. Market volatility continued this week, but saw very little net change in the major U.S. stock indices.
3. Oil continued to weaken, gold fell, and interest rates eased higher.
4. FED increases FED Funds rate .25% as expected.

Holiday Market and Office Hours:

With the Christmas Holiday coming this week, the U.S. stock markets will close early on Christmas Eve, Thursday, December 24^th at 12:00pm CST, 1:00pm EST and will be closed on Friday, December 25^th.  Our offices will close early this coming Wednesday, December 23^rd at 3:00pm CST, and will be closed both December 24^th and December 25^th for Christmas.  We will be back in the office for business as usual on Monday, December 28^th.  We wish you and your family a wonderful Christmas this year and hope you are able to spend extra time with all those that are important in your life!

 

The Markets:

Last week brought the volatility in the markets that would be expected given the FED meeting and their decision to increase the FED funds rate by .25%.  Leading up to the FED decision, and the day of their announcement on Wednesday, stocks rose sharply, only to give up those gains by week-end.  After all was said and done, the actually change for the major U.S. stock indices was nominal.  For the week, the Dow Jones Industrial Average dipped .79% and the Standard & Poor’s 500 stock index was off just .34%. (MarketWatch)

Interest rates eased higher, with the yield for the 10 year U.S. Treasury ending Friday at 2.19%, up .09. (U.S. Treasury)  The rate for a 30 year fixed mortgage ranged from 3.875%-4.169%, while the 15 year fixed rate ended Friday from 3.125-3.531%. (Bankrate.com)

Oil prices continued to weaken, with West Texas Intermediate Crude dropping .81 to close Friday at $34.55 per barrel.  This compares with a price of $53.27 per barrel at the start of 2015.  Gold dropped $10.00 per ounce, ending the week at $1,062.50.  (CNBC)

Another area that has gotten the attention of investors has been the big backup in yields for high-yield debt, also known as junk bonds.

Much, but not all has to do with energy and mining high yield bonds, which have seen yields spike sharply due to falling oil prices and the general woes in the industry (Bloomberg). Further, if you look at the selloff in junk bonds (yields and prices move in the opposite direction), the lowest quality bonds have been hit the hardest (St. Louis Federal Reserve).  What’s happening in the high-yield space is worth monitoring and is one indicator we watch closely.

The FED:

Liftoff, the commonly term used to describe the long-awaited move by the Fed away from zero, has begun. After holding the fed funds rate within a range of 0-0.25% since late 2008, the Federal Reserve announced it hiked the overnight lending rate banks use to lend to each other by 0.25% to a target range of 0.25-0.50%.  In some respects, it was the historic moment many were waiting for – the Fed finally left the emergency rate implemented during the height of the financial crisis. But in other respects, it was mostly a symbolic move, as short-term rates remain extremely low.

Looking back at the past seven years, the Fed’s super-easy monetary policy did not produce the dire consequences some had forecast, nor did it fuel a strong economic expansion. Talk that low rates and trillions of dollars in Fed bond buys would create hyperinflation, a collapse in the dollar, and a foreign flight out of Treasuries never materialized.

Yet, while the stock market has moved higher off the 2009 lows and more people in the U.S. are working than ever before (U.S. Bureau of Labor Statistics), the recovery has been among the weakest in the modern era. In other words, there have been limits to what the Fed can do to promote economic growth.

The Fed’s press release that followed the meeting contained the word “gradual” twice when describing the expected future trajectory of rates. And the Fed said it would continue to closely monitor inflation, which suggests a lack of progress in getting inflation back to its 2% target could slow future rate hikes.

But projections for the fed funds rate from each of the 17 Fed officials may have signaled a slightly more aggressive posture than some investors had expected (Federal Reserve Economic Projections). By the end of next year, the median forecast for the fed funds rate is 1.40%, or four projected rate hikes in 2016.  Still, a rate below 1.5% is historically quite low. As Fed Chief Janet Yellen has stressed, forecasts are subject to change and depend on economic conditions.

Christmas is a reflective time of year, and we are always humbled and honored you’ve placed your trust in our firm. We want to take a moment and wish you a Merry Christmas and a joyous holiday with family and friends.

God Bless,

Your TEAM at F.I.G. Financial Advisory Services, Inc.

“For to us a child is born, to us a son is given; and the government shall be upon his shoulder, and his name shall be called Wonderful, Counselor, Mighty God, Everlasting Father, Prince of Peace.”    Isaiah 9:6 ESV

 

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