Interest rate increases: This time it is different

History rarely repeats itself, at least not exactly. Generally, the threat of rising interest rates has, many times in the past, led to a retreatment in the markets. But as in Goldilocks there is tightening in the interest rates, which this time around seems to have not deterred the markets. They have gone up 16% in the 15 months since rate hikes started. And then there is too much tightening, which can bring out the Bear. To their credit, the Fed are advancing very cautiously.

The pros:
Interest rate increases benefit savers, increasing returns from fixed income instruments

The cons:
Increasing rates affect borrowing and reduce corporate profits
Household wealth decreases due to higher rates on loans, reducing overall spending which can affect the economy

With interest rate increases comes rising inflation. The Fed has an inflation target of 2% by next year. An inflation rate that is much lower, a year from now, would indicate an economy that is not picking up as much steam as expected. However, an inflation rate that is growing quicker than the wage increase rates would put brakes on the economy as consumers reduce their spending, reeling in the Gross Domestic Product. In this game, hitting the middle of the road is critical, and it appears so far so good!

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