The Federal Reserve meets this week and will decide if economic conditions warrant raising interest rates. Markets are currently predicting with near certainty a rate rise of 0.25% to a range of 0.75%-1.0%. While the level of attention interest rates have received is very high, investors should know that the pace of hikes has been extremely slow and measured.
Examining the chart below of the historical federal funds rate (the interest rate the Federal Reserve makes changes to at its policy meetings), one can see that an uptick of 0.25% is very modest relative to the past.
During many periods, the Federal Reserve raised interest rates at a much faster pace. From February 1974 to July 1974, the federal funds rate went from 9% to 13%. Over just six months in 1980, the Federal Reserve brought rates from 9% all the way to 19%. Even in more recent years, interest rates rose at a faster speed. From June 2004 to May 2005, rates went from 1% to 3% and then from June 2005 to May 2006 rates increased from 3% to 5%.
While investors may have grown accustomed to low interest rates, the Feds current pace of increases is much slower than many prior times, giving investors extra opportunities to adjust.
Source: Hefren-Tillotson, Bloomberg
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