While the running of the bulls in Pamplona, Spain can elicit rising heart rates, the opposite can be said for a raging bull market in the face of rising interest rates. According to Joe Amato, Neuberger Berman president and chief investment officer, rising rates could stymie a bull market run that saw the S&P 500 record the longest in history on Wednesday.
“Typically bull markets don’t die as we often said of old age, they die often because rates rise at a rapid rate and contracts economic activity,” said Amato. “We don’t necessarily see that in the horizon–the Fed has been careful, but it’s certainly one of the things we’re watching quite closely.
Slow, Steady Rate Climb
Federal Reserve Chairman Jerome Powell said in a speech at the central bank’s annual retreat in Jackson Hole, Wyoming that a gradual rate hike is to be expected. In June, the Fed hiked interest rates for a second time, bringing the federal funds rate up 25 basis points to its current level of 2.
“I see the current path of gradually raising interest rates as the (Federal Open Market Committee’s) approach to taking seriously both of these risks,” said Powell. “As the most recent FOMC statement indicates, if the strong growth in income and jobs continues, further gradual increases in the target range for the federal funds rate will likely be appropriate.”
Related: Meeting Minutes Suggest Fed Likely to Raise Rates
With a tailwind of strong economic data and a stock market that boasts the longest bull run in the S&P 500, the prevailing sentiment continues to be that the Fed would continue to raise rates. Per MarketWatch, current market odds are showing a 96% probability of a rate hike in September and 60% chance of another in December.
“We expect the Fed to be data driven,” said Amato. “So to slow down, if appropriate, if economic indications are such, but one of the things we’re all wrestling with is the amount of liquidity that’s been pumped into the system over the last number of years. If you see what the Fed and central bank balance sheets have done–gone from $4 or $5 trillion to $15 trillion–that process is slowly reversing and I think it’s something we haven’t seen before.”
The announcement will most likely catch the ire of U.S. President Donald Trump who once again took jabs at Federal Reserve Chairman Jerome Powell for raising interest rates, telling political donors at a fundraiser in the Hamptons that he hopes the Fed Chair eases up on monetary policy.
So far during President Trump’s tenure, the Fed has hiked interest rates fives times versus just once during former president Barack Obama’s tenure. With major stock market indexes closing in on record highs, the prevailing sentiment is that two more interest rate hikes will occur prior to the end of 2018.
Related: Richmond Fed President Says Rates Must Keep Rising
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