The most recent FOMC minutes painted an unexpectedly hawkish picture, implying that the next Fed rate hike could come as soon as June. Following the release, Richmond Fed Chair Jeffrey Lacker told Bloomberg that he sees a strong case for a June hike and plans on pushing for a total of four hikes by the end of the year.
This week, Philadelphia Fed President Patrick Harker also projected a June hike and said that he sees the possibility of one or two additional hikes by the end of the year.
Many investors credit historically-low interest rates as the driving force behind the seven-year bull market rally in U.S. stocks. Would a ramp-up in Fed tightening spell the end of the rally?
The Fed, Interest Rates And Stock Reactions
According to Brad McMillan, CIO for Commonwealth Financial Network, rising interest rates may mean an end to the creative financial engineering that has been driving earnings growth in recent years. But investors shouldn’t miss the bigger picture.
“The real story behind a Fed rate increase isn’t the damage that might be done,” McMillan explained.
“Though that’s a legitimate concern, that’s minor in the bigger picture. The real story is what the Fed’s move would indicate about the economy as a whole.”
McMillan said the Fed’s openness to a June hike indicates that the committee believes that the U.S. economy is on track to continue to grow organically, which is good news for investors.
He also mentioned the early part of a Fed rate-tightening cycle is typically associated with strong economic growth and a rising stock market.
Since the Federal Reserve’s first rate hike of the new cycle back in December, the SPDR S&P 500 ETF Trust (NYSE: SPY) is up 0.5 percent.
Disclosure: The author holds no position in the stocks mentioned.
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