The Federal Open Market Committee (FOMC) meets today for the tenth time this year and there are growing expectations that the U.S. Federal Reserve and other central banks may be considering raising their key rates sooner than later amidst hopes of economic recovery.
Now that two major central banks, the Bank of Australia and the Norwegian Bank have begun to tighten their monetary policies in October, each by lifting their borrowing benchmark rates by 25 basis points, more pressure will be added to the FOMC to consider a rate increase in the near future. However, it's expected that the Fed will leave interest rates unchanged this time.
When they do decide to lift rates in the future, will the equity markets welcome the increase?
The U.S. Federal Reserve’s overnight rate at which depository & financial institutions lend to one another is currently is at an all-time historic low range of 0-0.25%. Since July 1990, the Fed has made changes to its monetary policy, through tightening or easing of its benchmark rate 78 times. Over the course of the current recession that began at the end of 2007, the Fed has cut its benchmark rate by nearly 525 basis points. The most recent rate cut that took the Fed Funds target to its current level occurred on 12/16/08 and led gains in the S&P of 5.14%, 4.2% in the Dow , and 5.41% in the Nasdaq Composite for that day.
Tightening vs. Easing
In addition, the central bank has changed the direction of its monetary policy 8 times in the past 19 years. Whenever the Fed changed its direction for the first time by hiking its rate, the major indices posted larger than average gains over the 6 months that followed, versus smaller than average gains when the Fed first slashed its rates.
See table below for Target rate levels, and basis point changes.
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