On Rate Hike Hysteria

I've been a market observer for decades. When I was as young as 15 years old, I perused my mother's subscription to the Value Line Survey, which each week, analyzed dozens of firms for their investment potential. It sparked a lifelong interest and passion for the markets that's carried me to this day. Having said that, these are probably the most unusual times in the markets I have lived through, but one of the most bizarre results of the near zero overnight interest rate environment we're living in is the endless speculation on the timing of a rate hike. This has become the Kim Kardashian of the financial media, where the interest rate paparazzi can barely get to a commercial break without gushing over the “timing” of the first move upwards. Morning, noon and night, there simply must be some sort of nod to the impending event, awaited with the breathless anticipation of a Beatles reunion, as if such a thing were possible.

Folks, can we all calm down? It's only going to be a 25 basis point hike to start with, and it does represent something of a blessed event: an economy that's warming up, getting people into jobs, with a fresh army of wage earners out there spending money and doing things like buying homes, cars, taking vacations, eating out, indulging themselves, and sparking what is known in economics as a “virtuous cycle,” as each strength reinforces itself to a new strength. This has been a tough slog for millions of people, and we should be grateful we finally have some wind on our backs.

But the preoccupation with "the hike" has long since reached a fetish stage with the rate paparazzi, and their endless feedback loop of stoked anticipation over the timing of it is more destabilizing to the markets than the actual event could be.

Since the Fed chopped the funds rate down to zero in 2009, it didn't take six seconds for the legions of “opinion makers” in the financial media to start staking out claims when the Fed would raise it back up. And they've been wrong for six years now, then go back on Bloomberg/CNBC/Fox/WSJ etc., and simply make a newwrong prediction. No doubt once the first hike is done, it won't take another six seconds for the same people to make the same wrong predictions about the next one. No matter. As long as they spell your name right, I guess it's all good exposure. But already, in the face of a twenty five basis point hike, bond markets and dividend producing stocks have been rattled. Not to worry: overreaction is how you make money in the markets, and volatility favors the cooler heads. (You knew that part, right?)

But let's put this in perspective from an investment or personal standpoint. I'll stick my neck out to say your bond portfolio won't melt down, and all of the folks out there who have been whining about this rate environment “hurting savers” (see my earlier piece on this) will NOT wake up next year and see their checking accounts paying out a 5.00% APY. And that's reason enough not to get crazy over this. Moreover, successive rate hikes will more than likely be dragged out. The Fed is scared witless of repeating the mistakes of 1937, when stimulus was pulled too quickly, resulting in a backslide in the midst of the recovery from the Great Depression, and they're surely not going to repeat the Greenspan debacle shown here in this Fed Funds chart.

So let's put this in perspective, shall we? This modest boost heralds the beginning of an ever strengthening economy, with labor slack still there to soak up, low commodity prices, and little inflation to be seen. In other words, things are shaping up for a pretty good time for the country, and with no hurry to throw the anchor overboard. Just don't expect to live off bank CDs any time soon.