Waiting on the World to Change

It’s been more than six years since the Federal Reserve (Fed) last touched its target short-term rate. Finally, the time has come.

Shifts in monetary policy have always been important for markets, and this one could be even more meaningful given the length and extent of global central banks’ interventions since the financial crisis. But investors should keep these important points in mind:

1) While there’s been much ado about Fed “liftoff,” that first fateful move is actually less important than the anticipated pace and path of subsequent hikes.

2) Fed actions are but one dynamic shaping markets today. We believe the big picture is worthy of equal, if not greater, consideration.

Notwithstanding the liftoff-induced volatility, we believe the longer-term implications for financial markets should be more benign. The Fed has pledged that subsequent rate increases will be measured and gradual. Central bankers have gone as far as to say the so-called terminal federal funds rate—where they’ll stop hiking—will be well below that of previous tightening cycles. Keep in mind, however, that there is no preset path to “normal” and that could mean plenty of uncertainty as the Fed proceeds.

Even as Fed liftoff grabs the most headlines, we believe there are other equally if not more meaningful forces at play that will influence the economic, interest rate and investing environment going forward. First among them: important differences in economic prospects and monetary policy around the world.

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