Since we spent the past several weeks explaining why the Federal Reserve Board was likely to raise rates last week, we can definitely say that the Fed’s decision was not a surprise — especially since the increase was limited to .25%, which was also expected. A disappointing jobs report could have caused the Fed to hold back, but that did not happen. Now, the most important question is, where do we go from here?
In this regard, the tone of the Fed statement is just as important as their decision to raise rates. While much more information will come out when they release the minutes of the meeting in a few weeks, their statement after the meeting gives us plenty to go on. It is also not a surprise that their statement confirmed that the Fed is satisfied with the direction of the economy at the present time and that they feel that the economy can “withstand” higher rates. It is also not a surprise that they feel that more rate increases are possible in 2017.
This brings up an important question. The economy can withstand a few rate increases, especially because rates were so artificially low. But how many increases can be absorbed before the economy starts to respond negatively? Though we can’t answer this question, we do remind our readers that the Federal Reserve Board’s move directly affects short-term interest rates, and only indirectly affects long-term rates. If the markets feel that the Fed is being aggressive to stave off the threat of inflation, then longer-term rates, such as rates on home loans and even cars, may not move as fast. Of course, if the economy keeps humming, then long-term rates are more likely to be affected at the same time.