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3 R’s for 2016: Rates, Risk and Recession

It finally happened – the Fed raised rates. The overdue move is an official sign of economic recovery. It’s also a sign that the Fed is tightening its belt (despite commanding a multi-trillion dollar portfolio).

In its pledge to maintain accommodative economic conditions, the Fed proved less dove-ish, but not quite hawkish. The zero-percent policy of the recent past distorted things – I mean, remember when a 5 percent return was considered risk-free?

The Fed’s quantitative easing (QE) policies and zero-percent rates created an environment where absorbing risk has essentially become a prerequisite to achieve positive returns. With everyone taking on risk, liabilities (aka deposits) moved out of the banking system and into risk assets.

What does this all mean for the average American?

First, this is the first of a series of projected rate hikes. Four more are predicted in 2016, each one being a 0.25 percent jump. While rates will go up, it will be a slow rise. So for those with an adjustable rate mortgage or high consumer debt, consider locking in to a fixed rate while rates are low.

Second, at least one Fed official predicts there will be no recession through 2017. I hope that ends up being true.

At zero percent rates, the Fed has few tools to remedy recession conditions. So the modest hike (and similar ones in the future) could just be wiggle room in case cuts are needed.

Without room to cut, the Fed will be forced into more QE or money printing, and we’re back where we started, except probably in a recession.

So we could see zero-percent rates again before we see 2 percent or more. It’s been inaction for years, but the near future could be much different!

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