The Road to Normal

December 19, 2015

Trading in U.S. equities were subject to unexpected swings on Friday because of a quarterly event known as quadruple witching, when futures and options contracts on indexes and individual stocks expire. The operator of the S&P 500 will also rebalance the index in a quarterly move to adjust member weightings.

 

After seven years of the most accommodative monetary policy in U.S. history, the Fed on Wednesday, as widely expected, approved a quarter-point increase in its target funds rate. The new target will go from a range of 0 - .25% to a new range of .25% - .50%.  Most members expect the new rate to average around 0.375 percent before the next hike.

 

The decision, given the official stamp of approval from the Federal Open Market Committee, marks the first increase since the panel pushed the key rate to 5.25 percent on June 29, 2006. In a succession of moves necessitated by the financial crisis and the Great Recession that officially ended in mid-2009, the FOMC took the rate to zero exactly seven years ago in December of 2008.  Despite the history-making move, the road back to normalcy will be a long one. FOMC officials made it excessively clear in post-meeting documents that the pace of increases will be gradual and dependent on the quality of economic data. The projections and statement following the meeting reflected an effort to deliver the "dovish hike" many on Wall Street had been forecasting.

 

Fair or not, on the heels of the Federal Reserve's widely expected increase, Wells Fargo announced it would increase its prime rate (the rate at which individual banks lend to their most creditworthy customers) to 3.5 percent.  Other banks followed suit, including U.S. Bancorp, JPMorgan Chase, and PNC. However, the deposit rate, which is the interest rate banks pay to its account holders, have and most likely will remain unchanged.

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