Why the Fed Raises Rates

We wanted to talk to you about how good news for the economy could possibly be bad news for the markets. This topic can sound counterintuitive so let us explain. When the economy is growing, more jobs are being added, which leads to more money and investing, one would imagine this would be good for the markets. So how can this not be the case? Usually, this can occur when the Federal Reserve is on a tightening schedule. This happens when the Fed is raising interest rates. This is done to in efforts to keep inflation at bay and keep the economy from over-heating.

Too Much of a Good Thing?

The stock market is a predictive instrument of the future so when the Fed tightens, raises rates, it could be perceived by individuals as occurring too much which can cause the market to come down. Late in the cycle, for example, you can have great news like the recent December jobs report and then, in turn, the market falls. People could become worried that the Fed will tighten, slowing the economy down in the future and then possibly cause a slip into recession, which, would be bad for the markets. So, when you are in a late in the cycle, too much of a good thing could be a bad thing. Currently, we are in a sort of limbo mode, not too hot, not too cold. You definitely don’t want bad economic data but you can have too much of a good thing. This is an area we are watching closely.

 

Trey Booth, CFA®, AIF®
Senior Vice President
Wealth Consultant
Email Trey Booth here

 

Fi Plan Partners is an independent investment firm in Birmingham, AL, serving clients across the nation through financial planning, wealth management and business consulting. Fi Plan Partners creates strategies in the best interest of their clients using both fee based investing and transactional investing.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Economic forecasts set forth in this presentation may not develop as predicted.

No strategy can ensure success or protect against a loss.
Stock investing involves risk including potential loss of principal.

Securities and advisory services offered through LPL Financial, Member FINRA/SIPC and a registered investment advisor.

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