What This Week’s Federal Reserve Interest Rate News Means for Markets in 2016

Money Morning Contributor
Font Size:

Global stocks and commodities are rallying today (Wednesday) following the U.S. Federal Reserve interest rate announcement from Chair Janet Yellen yesterday.

Yellen was extremely dovish in yesterday’s Federal Reserve interest rate statement, saying the central bank needs to remain cautious when hiking rates this year. The Fed has also cut the number of rate hikes it plans to hold in 2016 from four to two.

This news will continue to have a major impact on stocks in 2016, but before we get to that outlook, here’s how stocks are trending today…

federal reserve interest rate hike
U.S. stock markets jumped early Wednesday. The Dow, S&P 500, and Nasdaq were all up more than 0.7% in early morning trading.

The Stoxx Europe 600 was up 1.8% midday. Asian markets also followed Wall Street higher. The Shanghai Composite Index closed up 2.8%, and Hong Kong’s Hang Seng Index gained 1.7%.

During yesterday’s Federal Reserve interest rate statement, Yellen said that “global developments pose ongoing risks.” These risks have contributed to the financial market volatility witnessed both last summer and in early 2016.

A key concern is the slowing pace of global growth, which is widely influenced by developments in China. Yellen acknowledged the consensus is that China’s economy will slow in the coming years. The world’s second-largest economy is transitioning away from investment toward consumption, and from exports toward domestic sources of growth.

In short, Yellen’s message was that the Fed interest rate policy will be adjusted as necessary. Policy adjustments include keeping interest rates low, which will hopefully stop low oil prices and other factors from weakening the U.S. economy any further.

Today’s jump in U.S. stocks shows just how much influence these Federal Reserve interest rate announcements have on the markets. Here’s what investors can expect for the rest of 2016…

What Dovish Federal Reserve Interest Rate News Means for Markets in 2016

Futures show traders now see a zero chance that Yellen will change her policy stance in April and raise rates. Traders now put the likelihood of a November hike at 54%.

That sentiment is bullish for stocks and commodities in 2016. When the Fed is dovish, investors feel more comfortable investing in stocks.

Investors have become accustomed to an environment of low interest rates. The Fed has kept its official interest rate near zero since December 2008 to support economic growth and bolster the U.S. economy in the wake of the global financial crisis. Yellen’s comments Tuesday suggest investors can expect lower rates for longer.

As markets have seen over the past several months, the mere anticipation of rate hikes can make things volatile. That anticipation was tempered yesterday.

Low interest rates are also good for home buyers, car buyers, and businesses looking to expand. Low rates help keep the dollar in check, which is bullish for multinational companies. A strong dollar makes U.S. goods more expensive abroad, which cuts profits.

The U.S. dollar slipped 0.2% to $1.1317 per euro today, and dipped 0.3% to 112.33 yen as it dropped against all of its major counterparts. Bloomberg‘s dollar index, which tracks the dollar against 10 major peers, has lost 3.7% in March. The index is on pace for a second straight monthly drop and the biggest decline since September 2010.

Low rates are also bullish for gold and silver prices in 2016. Gold and silver are priced in dollars and become more affordable to foreign buyers when the dollar softens.

But not everyone benefits from low rates. Bank stocks are hit particularly hard during low price environments.

The banking sector’s profitability decreases with low interest rates. Institutions in the banking sector, including retail, commercial, and investment banks, as well as insurance companies and brokerages, have massive cash holdings due to customer balances and business activities. Near-zero rates decrease the amount of interest they can make on this cash and directly impact earnings.

If Yellen sees the U.S. economy strengthening, she has left the door open for additional Federal Reserve interest hikes this year. Investors will want to keep a close eye on economic data ahead of the next FOMC meeting on April 27.

Stay informed on what’s going on in the markets by following us on Twitter @moneymorning or liking us on Facebook.

Related Articles:

About Money Morning: Money Morning gives you access to a team of ten market experts with more than 250 years of combined investing experience – for free. Our experts – who have appeared on FOXBusiness, CNBC, NPR, and BloombergTV – deliver daily investing tips and stock picks, provide analysis with actions to take, and answer your biggest market questions. Our goal is to help our millions of e-newsletter subscribers and Moneymorning.com visitors become smarter, more confident investors.To get full access to all Money Morning content, click here.

Disclaimer: © 2016 Money Morning and Money Map Press. All Rights Reserved. Protected by copyright of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including the world wide web), of content from this webpage, in whole or in part, is strictly prohibited without the express written permission of Money Morning. 16 W. Madison St. Baltimore, MD, 21201.

Money Morning