To the surprise of no one, the Federal Reserve Board raised interest rates by 0.25% in March. It was the sixth time since December 2015 that the Federal Open Market Committee boosted rates.
And yet, the Federal funds rate is still a meager 1.5% to 1.75%.
Regardless, the Fed’s cautious moves have created exceptional volatility in the stock market. Just as plummeting interest rates boosted the market to record-breaking levels, even a tiny, predictable upward movement in interest rates is causing the market to wobble.
The S&P 500 suffered its first quarterly loss since 2015, falling 1.2% during Q1 ’18, while the Dow Jones Industrial Average fell 2.5%. Conversely, the Nasdaq composite index rose 2.3%.
During the second quarter, we can expect “increasing concern about the impact of rising interest rates on market valuations and volatility,” according to The Wall Street Journal.
While the Fed’s forecast calls for three rate hikes during 2018, with economic growth accelerating, CNBC noted that “at least one more increase was added in the following two years.”
While the Fed predicted in December that the economy would grow by 2.5% in 2018, it is now predicting growth of 2.7%. The Fed also raised its projection for 2019 from 2.1% to 2.4%.
As we’ve previously noted, the Fed was overly optimistic about economic growth during the Obama administration and has been overly conservative in its predictions under President Trump.
The economy has been growing at a rate of close to 3%, but if the Fed were to predict growth at that rate, investors would expect the Fed to increase interest rates at a faster pace and the stock market would likely see another correction.
In today’s post-quantitative easing world, good news continues to have a negative impact on the stock market. Hopefully, that we’ll end soon and good news will again become good news.