Short-term interest rate increases have actually been underway since 2013.
Has the market been leading the Fed to increase interest rates, or has the Fed been leading the market by setting expectations for the purpose of not surprising market participants?
Although no one knows the answer to the “chicken and egg question,” both scenarios may have led us to the same outcome experienced on December 16 — a market that was unsurprised and able to digest the first increase in the federal funds target rate since 2006 without a catastrophic loss.
In fact, yields on US Treasuries ended the day relatively unchanged from the previous trading period, and in some cases below their highs for the year. In a world where 1% equals 100 basis points, the 6-Month US Treasury bill yield ended three basis points lower, the 1-Year US Treasury note one basis point higher, and the 2-Year US Treasury note four basis points higher.
The market’s ability to reflect the probability of different outcomes and events in security prices reinforces the greater importance of focusing on asset allocation and diversification as opposed to parsing information from “news” in an attempt to forecast future market activity.
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