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Putting the Fed Rate Hike in Perspective

You probably noticed that the world didn’t come to an end when the Federal Reserve raised its key interest rate recently.

Despite real reasons to be mindful of the direction of interest rates, here are two important points to keep in mind.

Let’s Get Real About the Raise

First, the 0.25 percentage point hike in the Federal Funds Rate was probably the most thoroughly anticipated financial event of the year. When something so heralded, discussed and interpreted comes to pass, you can assume that financial markets have already incorporated the message into prices so thoroughly that the action itself becomes a non-event.

Second, unless the current low interest rate environment has so completely erased memories of “normal” rates of interest – say, 3%, 4% or 5% – we mustn’t forget that a hike of one-quarter of one percentage point is a tiny, tiny increase in absolute terms. Neither should we forget that interest rates are still at rock-bottom levels in absolute and after-inflation terms.

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