Today, the Federal Reserve raised U.S. interest rates for the first time since June 29, 2006, a move much anticipated by the market, marking a pivotal moment for both the U.S. and the global economy.
We believe the important point now isn’t the 0.25% rate hike, but what the future path of interest rates might look like. Based on our understanding of the Fed’s intentions, we believe the Fed is committed to a wait-and-see course driven by evolving market and economic data.
Fed leaders have repeatedly said they plan to raise interest rates much more slowly than in previous periods of monetary tightening, and we don’t believe that even the more hawkish Fed officials plan a long series of additional rate hikes following today’s move. While there’s no guarantee, we believe the Fed intends to push inflation higher to avoid both deflation and recession.
The next important issue is the impact rising rates might have on the bond market. Conventional wisdom says rising rates are bad for bond investors, but the full story isn’t that simple or negative. As we stated in September — contrary to the naysayers — we believe it’s time to celebrate, since rising rates typically mean higher income and better global economic growth.
We believe that the bond market may be volatile as it adjusts to this new era of rising rates. Nine years is a long time to go without a rate hike, and we’ve already seen some evidence of skittishness in the bond market. Third Avenue Management’s recent announcement of a freeze in redemptions from its low quality, high yield bond fund spooked investors and highlights the potential for turmoil.
Now that the Fed has announced its decision to raise rates, we believe our earlier opinion favoring active management in bonds remains a prudent strategy for most fixed income investors. We continue to believe that more nimble active management has the potential to achieve higher returns and greater diversification while providing investors desired liquidity.
The media have been speculating about the Fed’s decision for some time, and we expect they’ll have much to say about today’s rise in interest rates. However, market noise and short-term volatility rarely have a lasting impact on your portfolio’s value. The markets, the managers we select, and your GV team have anticipated this rate hike for some time. We welcome the Fed’s action as a sign that the economy and the markets continue to recover from the 2008-2009 global financial crisis.