This week the Board of Governors of the Federal Reserve (the â€œFedâ€) raised interest rates in the US. In our view, this signaled some confidence in the US economy and specifically in a strong US labor market. However despite this decision, US interest rates remain low by historical standards and the new target rate of 0.25%-0.5% is below the past several decades of the Fed Funds rate prior to 2009. However, we do not believe the Fedâ€™s recent action makes continued rate increases a certainty. For example, the recent experience of Japan shows that interest rates set by a central bank could remain below 1% for 20 years.
Remember too, that our recommended portfolio is internationally diversified. Though the actions of the US Federal Reserve can be important, your portfolio has global exposure and responds to global monetary conditions. This is important to bear in mind as US monetary policy decisions dominate the media.
Additionally, according to the book, Invest With The Fed, both equities and bonds have historically delivered positive returns over a 48 year sample period regardless of whether rates were rising, falling or indeterminate. Based on this analysis, the actions of the Fed, in part because they are taken in response to a robust US economy, may not necessarily be harmful to our recommended portfolio.