Fed Follies

Yesterday’s Fed meeting minutes indicated a bias towards raising rates at the next (June) meeting.

The economic consequences of a quarter point increase in short rates are negligible. However, the market consequences could be significant. In reducing rates to their present ultra-low levels, the Fed has forced the risk-adjusted expected returns on all investments to similarly ultra-low levels. Increases in rates should allow investment returns to creep up. This means that investments need to be re-priced lower relative to the expected stream of future cash flows. This will especially affect the stock market, where the cash flows (earnings) have been declining for over a year.

profits

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