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The Fed Finally Acts

| December 21, 2015
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MPCA Weekly Market Update

Last week was all about the Federal Reserve decision to increase interest rates above the 0.25 upper bound for the first time since 2008. Yields rose on both Monday and Tuesday as it became more evident that the Fed would increase interest rates on Wednesday’s announcement, especially after Tuesday’s inflation reading was high enough to support an increase. The rise in yields was not as dramatic as it could have been had the Fed weighed in with a more hawkish tone rather than the dovish stance expressed during Wednesday’s announcement.  Rather, yields only increased slightly in what was described as “the most well-telegraphed and most dovish hike in history,” according to one chief investment strategist.

There was also housing and manufacturing data on Wednesday that was viewed as strong enough to keep up the rate hike. Yields then pulled back the last two days of the week, as investors scooped up U.S. debt over foreign debt on Thursday and equities dropped significantly on Friday, causing investors to seek the safety of US Treasury securities.

Oil was volatile over the week but ultimately ended down 2.5%, a major reason why US equity markets retreated sharply later in the week, with the S&P 500 Index returning -0.3% overall.  Crude rose to $37.35 on Tuesday, only to fall to $34.73 as of Friday, which is a low for the year.  We believe that yearlong weakness in crude oil prices reflects a surplus of supply more than an absence of demand, and that the “tax cut” of lower energy prices will ultimately benefit domestic consumers that find themselves with more cash in their wallets.

It is noteworthy that, after nearly a decade of quantitative easing and other financial measures, the Fed finally thinks the U.S. economy is strong enough to absorb slightly higher interbank lending rates.  Markets (and MPCA!) will be attentive to the pace of Fed increases and the slope of the yield curve in the days and months ahead, looking for clues that the Fed is getting it right in striking a proper balance between inflation vigilance and economic sustainability.

We will resume these weekly comments in the New Year.  Until then, Merry Christmas and Happy Holidays to all!

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