Where Do We Go From Here?

Fundamentals of Market Investing by Adam J. McKee

The last ten years have been a golden time for stock investors.  Inflation rates have been low, and the Fed has kept the interest rate low to make sure the economy didn’t stall again after the real estate bubble burst.  There were certainly some hiccups along the way, but if you were invested in the market over the entire period, you did better than the historical average.

When rates are very low as they have been, equities do well in part because bonds don’t.  My fear is that these conditions have held sway for so long that investors have forgotten (or are too young to ever have known) that inflation and high-interest rates are a real thing and that historical lows cannot last forever.  As a matter of policy, the Fed must raise rates.  The primary tool the Fed uses to prevent recessions is to make money cheap for businesses, which sparks economic growth.  If another recession threatens, what can the Fed do?  They must raise rates simply so that they can reduce them again at some future date.

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