Summary: What did the Fed just do? <a href="http://moneybasicsradio.com/wp-content/uploads/2015/12/image001-2.jpg" rel="attachment wp-att-13122"></a>Narrowly considered, the Fed simply changed the wording in their periodic statement, announcing that the range for inter-bank interest rates—Fed Funds—would go from zero to .25% to .25% to .5%. In other words, the rate will move from “essentially zero” to “almost zero.” Practically, if a bank borrows $1mm from another bank overnight, they’ll have to pay $13.89 rather than $6.94. You could almost call this the “Macbeth” interest rate move: full of sound and fury, signifying—nothing. But it’s not really nothing. Rate increases are like potato chips: the Fed can’t do just one. They’ve started to raise rates 12 times since World War II. In 11 of those 12 times, they’ve kept going until the economy tanked. That’s why Chair Yellen was at pains to emphasize the moderate pace of rate increases she and the Committee expect to take. Between the official statement, her opening remarks, and the subsequent Q&A session, Yellen used the world “gradual” or “gradually” at least 10 times. Message sent. <a href="http://moneybasicsradio.com/wp-content/uploads/2015/12/image002-1.jpg" rel="attachment wp-att-13123"></a> And it appears that the message was received. Normally, the stock market falls when the Fed raises rates. But this time stocks rallied: the Dow rose over 200 points; the S&P and Nasdaq went up 1.5%; stocks in Europe and Asia rose over 2%. Even bonds did well. After some volatility, the 10-year US Treasury note now yields roughly what it did three days ago, and less than it did a month ago. What’s next? It all depends on the economy. If we continue to live in a slow-growth, low-inflation world, nothing much will change. Consumers will keep spending, companies will keep hiring, markets will expand. But it never works out that way. Something unexpected will come along that shocks us. How efficiently our economy adjusts, how resilient we are—to borrow another line from Shakespeare—that is the question. Douglas R. Tengdin, CFA Chief Investment Officer Phone: 603-224-1350 Leave a comment if you have any questions—I read them all! Follow me on Twitter <a href="https://twitter.com/globalmarketupd" target="_blank">@GlobalMarketUpd</a> www.chartertrust.com • www.moneybasicsradio.com www.globalmarketupdate.net
