Fed Watch: Get Ready For the Cost of Money to Jump in 2018

The cost of money.

When you think about it, the prevailing interest rate to borrow money, whether for a house, a new refrigerator or a car is essentially the "cost" of money. For years in the U.S., the cost of money has been historically cheap.

The Zero Interest Rate Era Is Ending

The Federal Reserve famously and aggressively tugged its benchmark federal funds interest rate to zero-0.25% in December 2008, as the Global Financial Crisis began to unravel. U.S interest rates sat at that historically low level for years. It wasn't until December 2015 when the Fed pulled the trigger on a 0.25% rate hike. Then, there was one in December 2016 and two this year, leaving the funds rate at 1.00-1.25%.

Even though the Fed has hiked the funds rates a few times in recent years, it's been at a glacial pace.

What you need to know: The 1.00-1.25% level is still extremely low and very accommodative. Call it easy money if you want. But, the liquidity punch bowl for the stock bull market remains nearly full. For now…
 
A more historically "normal" level of interest rates is around 3.50-4.00%. We aren't even close. Check out the history of the Fed's open market operations here.
 
Fed Watch
This week, the Federal Reserve meets behind closed doors for a 2-day meeting Tuesday and Wednesday.
 
When: Here at SheCanTrade, I will be on the lookout for the updated policy statement around 2 pm ET on Wednesday.
 
But, don't expect much.
 
Wall Street fully expects this meeting to be a snore, with no change to the federal funds target range. There is no economic outlook or press conference attached to this meeting either.
 
Trading implications: Market action could slow ahead of the Fed meeting results, but since no policy shift is expected, it may simply be a non-event this month.
 
Next Fed move? The Fed will meet again on Dec. 12-13. The jury is still out on whether the Fed will pull the trigger on a third rate hike in 2017. You can monitor the probabilities of that with the CME's Fed Watch Tool. Find that here.
 
What about the Stock Market?
Bigger picture, what matters to the stock market is the level of interest rates. Historically, rising interest rates tend to be negative for the stock market.
 
We are at a true inflection point. The U.S. is finally moving away from quantitative easing (QE) to quantitative tightening.
 
Peering into the crystal ball for 2018, Capital Economics forecasts 4 rate hikes next year. That means the cost of money will get more expensive. People will pay more for the privilege of borrowing.
 
You may have heard of the "Three Steps and a Stumble" rule. Developed by legendary 1930s technical analyst Edson Gould, he suggested when the Fed hikes rates three consecutive times, the stock market is vulnerable to a potentially significant setback.
 
The Trend is Your Friend, Until It's Not
Its coming folks. The trading strategies you've used in recent years during the rising bull market may stop working, and soon.
 
The Fed is just one of the many influences that impact the direction of the overall market, individual stocks and options trades.
 
My Trading Journey
During my journey from part-time trader to full-time options trader, I've developed proven strategies that generate consistent income from the markets. In my book: How You Can Trade Like A Pro, I outline specific steps you can take to become more profitable.
 
I put on options trades every day. Follow my trades in my live options trading room and texting service for a trial offer ($7.00 for 14 days). While this Fed meeting may be a snore, the central bank is expected to kick up volatility in the markets in the months ahead. Come trade with me. The fun is just getting started.
 
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