“Lift-Off” is the next ‘big thing’. It is a term the talking heads are giving to the potential future rise in interest rates that will occur when the Federal Reserve begins the process of ‘normalizing’ rates. This nomenclature, “Lift-Off”, is straight out of the NASA and the Space Program and connotes a launching, a rapid rise. What better way to define that which will happenas the Fed begins the normalization process … lift-off … moon shot! These are great images if you are trying to scare people and that is the financial media’s game.
And, the media is overwrought with the question, “When?” When is this great ‘undoing’ of our financial markets going to begin? Because everyone knows rising rates will kill the market and the economy… or, will they? Will higher rates be any more deadly to the market that past forecasted fatal events like: the ‘tapering’ of Quantitative Easing or the end of QE. Both of these were heralded as potential disasters, but neither panned out … two months past the end of the Fed’s bond-buying program the market continues to make new all-time highs.
My suspicion is that the so-called “Lift-Off” will be greeted the same way, with a yawn. First of all, the “Lift-Off” will be heavily discounted, as everyone is expecting it. Secondly, unless we have an explosion of inflation, the “Lift-Off” will resemble, that of a hot air balloon, rather than that of a Delta IV Heavy Rocket.
So, if the Fed Fund’s target rate is currently .0% to .25% and the Fed (starting in July 2015) nudges up that rate 1% over a one-year period, by July 2016 we would be staring down the barrel at only 1.25% Fed funds rate. Then, let’s say they moved it another 1% over the next 12 months. That would get us closer to a more normal level. It would also, of course, cause a significant move upward in all rates. Are you scared, yet? Well, you shouldn’t be; because, according to this chart from the St. Louis Fed (http://research.stlouisfed.org/fred2/data/FEDFUNDS.txt), that 2.25% rate would still put us comfortably at the low-end of where Fed Funds have traded in the last 4 decades. Of course, all of this may happen on a faster timetable than laid out above, but the “Lift-Off” is unlikely to be the disaster the media will be calling for.
Don’t let them make you crazy on this one. It is all about perspective and they have none.
What’s your take?
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