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The Markets December 16, 2015
Fed Hike: Little Impact on Investors for Now
The Federal Reserve raised
interest rates by one-quarter of a percent, the first raise in nine years.
Reported by Jill Cornfield
For the first time since 2006, the Federal Reserve has raised interest rates at its quarterly meeting, after much anticipation and nail-biting. But not everyone is particularly moved by the quarter-percentage point increase, and this move—likely the first in a series of gradual raises—won’t make much difference to most investors, sources say.
The question of what this rate rise means for retirement plan sponsors elicits an amused response from Bob Doll, chief equity strategist at Nuveen Asset Management. “Nothing!” he tells PLANADVISER. “We went from zero to 25 basis points. It’s a nonevent.”
Doll believes this small increase is nothing to be concerned about, and might even yield some positive effects. “A few more quarter-point moves, and retirees that have money in short-term dated stuff are going to get more than zero,” he points out, “which will be a pleasant change for some. People got used to rolling their CDS over the last several decades, and now they will get a little bit of return.”
Recent research showed the extended zero-rate period to be a drag on retiree nest eggs.
The action is not one and done, Doll points out. “What it means is that rates are slowly going to go up,” he says. “I don’t think rates are going to get high, but it tells us that the era of free money and high returns is in the rearview mirror. For plan sponsors, the return profile is not as good as it was the last five years.”
NEXT: Size does matterIf Doll doesn’t seem too excited, he says it’s because the move was so well telegraphed and so overdue. “We have collectively—the investment community and those who cover it—made such a mountain out of a molehill,” he says. “It’s not like they’re going from 2-1/2% and we’re in debates at some point in time, discussing what is the rate increase that will be that straw that breaks the camel’s back.”
The Federal Open Market Committee (FOMC) in a statement Wednesday afternoon noted that the year’s “considerable improvement in labor market conditions” as one of the deciding factors. “[The Committee] is reasonably confident that inflation will rise, over the medium term, to its 2% objective. Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to ¼% to ½%. The stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to 2% inflation.”
“I wish I could give more sturm und drang,” Doll says, “but whose life really changes [from a rate increase of this size]?”