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As widely accepted the Federal Reserve increased interest rates for the first time since 2006. The Fed also stated any future increases will be “gradual,” signaling four quarter point increases during 2016.
I do not think this will have negative macroeconomic impact for the simple reason if a nominal 0.25% increase makes a project economically unviable, that project should have not been contemplated
In fact, macro economically I think the increase will be positive given the huge psychological impact. It indicates the proverbial “all clear sign;” the financial crisis is now officially over.
As inferred above, some may believe any increase is negative for the economy and the stock market.
As stated I think it is the opposite utilizing exercise as an example.
A tired and unfit person may think that they are too tired to begin an exercise regime and any exercise program will increase fatigue.
In reality however the inverse occurs when a sedentary person commences exercising. Exercise increases energy given the greater number of mitochondria’s (the power house of the cell) in the person’s body and increased blood volumes that forces more nutrients throughout the body.
Such an interest rate increase may force companies to begin spending some of their massive cash hoards, believing that it is now “ok” to spend money given Fed action. This is equivalent to increased blood flow when an exercise program commences.
Moreover any interest rate increase may actually increase the earnings power of many companies and people. Cash balances are at an all-time record…approximately $5 trillion dollars. For the last seven years, no interest was earned on this money. With fed action, the economy has earned 0.25% or approximately $50 million dollars. This is new found monies.
Moreover banks may begin to start lending monies given their increase profitability. Excess bank reserves are about $2.5 trillion, $2.5 trillion earning nothing. Historically excess bank reserves are around $1 to $2 billion. This is no typo.
Banks have now found a new profit center, a profit center that may force the banks to greatly increase lending which is the proverbial high power sugar buzz for greater economic growth, aka the economic mitochondria.
Yes, the above is counter intuitive about the impact of higher interest rates but so is it counter intuitive that exercise will increase energy levels.
Many have commented the “animal spirits” are lacking from the economy. Perhaps such an interest rate increase is the psychological edge to raise these spirits.
Markets were strong on the news. Treasuries retraced some of their losses thus suggesting the Central Bank will stay ahead of the proverbial curve.
Last night the foreign markets were up. London was up 1.56%, Paris up 2.47% and Frankfurt up 3.33%. China was up 1.81%, Japan up 1.59%and Hang Sang up 0.79%
The Dow should open modestly higher with perhaps the focus is now upon economic growth and earnings in 2016. As indicated, the Fed is suggesting a 1.25% fed funds rate this time next year, data permitting.
Will 2016 be the inverse of the last four years where the target will overshoot because of greater than expected inflationary pressures via greater monetary velocity? The 10-year is up 11/32 to yield 2.26%.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.