Listening to Fed Head Janet Yellen yesterday, it is obvious that she remembers that lesson well. No interest rate increase has ever been so well-telegraphed. Is there anybody left in the United States who does not know the next movement in interest rates will be up? Why will the stock market tank when it actually happens? Because it over-reacts!
But, I think it will be a sharply V-shaped recovery. One reason is that a rate increase is already “baked-into” the stock market, which has been listless all year. Another reason is that traders will remember that Yellen is primarily a dovish labor economist, who is very concerned with unemployment, and does not want to take the chance of prolonging long-term unemployment by raising rates. They will also remember that she NEEDS to prove to the market that she will raise rates. She needs to “earn her stripes” and this is the way to do it.
She has been consistent in reminding the Street that the Fed is data-dependent, not calendar-dependent. In the past, the Fed has often had a mechanistic approach to raising rates, by raising rates a modest amount at each meeting. She explicitly rejected that approach and base decisions on the most recent data. I suspect the rate increase will be “one & done.” That way, she earns her stripes, she temporarily quiets the Libertarians, she doesn’t hurt unemployment too much, and she doesn’t cause the dollar to appreciate too much more.
So, fear not the rate increase!