The general consensus is that the U.S. Federal Reserve will raise interest rates in December. How fast will interest rates rise and what effect will higher rates have on stock investing? Bloomberg Business addresses the first issue and believes that the Fed will keep rates unusually low for years.
The Federal Reserve is widely expected to raise interest rates next month, a move that some worry would make it harder for the central bank to achieve its goal of 2 percent inflation.
Wall Street says worry not: A newly released survey of the nation’s biggest bond dealers suggests Fed policy will be easy for years, even after a series of rate hikes.
The results show that primary dealers believe the neutral rate-the borrowing cost, adjusted for inflation, that keeps the economy at full employment with stable prices-is currently around zero, and will rise more or less in a straight line to 1.5 percent by the end of 2018. Compare that with the Fed’s own projections of where interest rates will be (adjusted for projected inflation) over the next few years.
How fast interest rates will rise will depend on the U.S. economy but the consensus of bond dealers is that we will see a slow and steady increase up to no more than 1.5 percent in the next three years.
Interest Rates and Stocks
When rates go up will it be good or bad for the stock market? According to The Wall Street Journal stocks have rallied recently based on a possible rate increase.
U.S. stocks rallied Wednesday after minutes from last month’s Federal Reserve meeting showed most officials anticipated economic conditions could be strong enough for a December interest-rate increase.
Major indexes posted their biggest one-day gains in nearly a month. The Dow Jones Industrial Average rose 247.66 points, or 1.4%, to 17737.16. The S&P 500 rose 33.14, or 1.6%, to 2083.58, and the Nasdaq Composite climbed 89.19, or 1.8%, to 5075.20.
“I think it’s a relief for the market that in the opinion of the Fed policy makers the economy is not falling apart,” said Keith Bliss, senior vice president at brokerage Cuttone & Co.
Financial stocks rallied, as higher rates can boost banks’ profits because they can widen the difference between what banks charge on loans and what they pay for deposits.
As the article notes, banks will benefit from higher rates. Another factor is the uncertainty that has affected markets for a year and a half as this issue has been on the table. The fact that rates will in all likelihood rise slowly and not very far seems to have reassured investors.
Utilities are in a class by themselves. They’re known for their higher-than-average dividend yields and lower than average stock volatility. There are a number of relatively safe utility stocks (i.e. low betas, meaning low stock volatility) that offer dividend yields in the neighborhood of investment-grade bonds, while offering potential stock returns as good as or better than the S&P 500 stock index.
The specific utilities mentioned in the article are NextEra Energy, Idacorp, Excel Energy, DTE Energy, Dominion Resources and Brookfield Infrastructure Partners. Our suggestion is to consider how fast interest rates will rise, wait for utilities to take a hit when the Fed raises rates and when buy when prices are depressed. As always do your own homework before investing.
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