Near the top of the list of things Wall Street can’t stand is rising interest rates.
That’s even more true now, with the Federal Reserve once again expected to hike rates after cutting them to zero in 2008, then keeping them at record lows for seven years as a way to inject adrenaline into a distressed economy.
That “cheap” money was “jet fuel” for stocks, making equities the only place to get decent returns, says Mark Hamrick, senior economic analyst at Bankrate.com.
On Wednesday, the Fed is expected to hike rates for the first time this year and sixth time since it began moving rates up from zero in December 2015. But what investors fear is this: New Fed boss Jerome Powell will signal four hikes are coming this year, not the three the Fed indicated at the end of last year. Higher rates make borrowing more expensive and restrict the flow of credit to companies and individuals, shifts likely to be a drag on stocks.
Slow and steady is the preferred pace of rate hikes, since that reflects a strong economy and robust corporate profits, which are generally good for stocks.
“The real question is how far the Fed is willing to go raising rates,” says Boris Rjavinski, a rates strategist at Wells Fargo Securities. “So far, they have approached it very cautiously, raising their key rate by only 1.25% in over two years.”
He says the total increase in the Fed’s key rate during the previous cycle from 2004 to 2006 was 4.25%. If the Fed indicates it is willing to go back to the old playbook and raise rates many more times, that would signal a big change, Rjavinski says.
That would “put the brakes on the economy much earlier than expected,” Hamrick says.
When it comes to coming rate hikes, “the market would not like the words ‘four or more,’ ” says Bruce Bittles, chief investment strategist at Baird.
