Fed’s Interest Hike Offsets Early Summer Doldrums
After several weeks of erratic trading and dreary results, Wall Street finally breathed a sigh of relief after the Federal Reserve indicated that it would be paying attention to both the overall health of the economy, as well as inflation indicators, as it reviews future lending rates. The statement accompanied a long-anticipated hike in short-term lending rates. The quarter-point increase to 5.25 percent was no surprise to the investment community - and many analysts expect to see an additional quarter-point hike in August when the Federal Reserve’s Open Market Committee convenes - but the language of the statement was sufficient to address concerns that Fed Chairman Bernanke might come down too hard. The markets traditionally hate uncertainty, and once news of the quarter-point hike was out, the Dow Jones Industrial Average (DJIA) soared more than 100 points on the news.
Government reports, issued a few hours before the Fed’s announcements, provided good news, too. The Commerce department raised first-quarter gross domestic product (GDP) growth to an annual rate of 5.6 percent, but decreased the GDP’s inflation measure to 3.1 percent. Together these numbers suggest that price increases are under control.
Investors need to know that the Fed is keeping inflation from getting the upper hand. However, to a nation so enamored of borrowing, rising interest rates can put additional pressure on consumer budgets, which in turn slows consumer spending. Inflation hurts everyone, but escalating interest rates burden those in lower income brackets most. The higher rates are forcing the rate of foreclosures and bankruptcies higher. Lower-income households, who are already facing soaring energy costs, are now also facing higher credit card interest rates and higher monthly minimum payments. The Fed walks a tightrope balancing its inflation-fighting zeal with a sound policy that considers the full implications of costlier credit on the nation’s overall economy.
The bulls hope that the Fed’s message - and its careful balancing act - will provide support for their positive view of the current investment climate. With corporate earnings strong and a solid economy to maintain this growth pattern, many analysts believe that stocks remain a bargain. They anticipate rising earnings and a healthy stock market.
This having been said, savvy investors may want to take advantage of summer’s more leisurely pace to take a look at their portfolio and overall investment strategy. Many popular sectors like emerging markets and energy and commodities have benefited from inflation fears. It may be that these sectors are over-subscribed and due for a slow-down in performance. None of this will happen overnight, but mid-year is often a sound time to take a look at the contents of your portfolio and plan to rebalance your holdings, if needed. As always, base your investment strategy on the counsel of your investment advisor and your professional tax consultant.