In short, we’re at the beginning of a sooner-than-expected, and very significant, period of transition for Fed monetary policy, and given today’s slow economic growth, the path toward normalizing rates is likely to involve a slower pace and a well-defined lower rate destination than past exits.
As for what this means for markets and the economy, news of a rate rise plan could disrupt markets in the near term, but I don’t expect to see another market reaction like the 2013 “taper tantrum” following the Fed’s taper announcement.
Rather, assuming the Fed clearly lays out its transition plan and key metrics and articulates that this exit strategy won’t look like the rapid ones of the past, the long-end of the interest rate curve should move up only modestly and remain relatively stable in coming months as the yield curve flattens, and markets should be able to adjust fairly smoothly.
In addition, a well-articulated Fed plan for normalizing rates at a slower pace and with a lower destination rate than past exits is likely to imbue corporations and other economic actors with more confidence in the future. As a result, they may engage in more long-term spending and investment decisions going forward, and capital spending, housing, and investment may move forward. This, in turn, should ultimately benefit the economy and markets.
Source: BlackRock Research
Rick Rieder, Managing Director, is BlackRock’s Chief Investment Officer of Fundamental Fixed Income, is Co-head of Americas Fixed Income, and is a regular contributor to The Blog. You can find more of his posts here.