Today in the bond auction, the 1-year Treasury bill yield hit a 10-year high at 2.02 percent. This is good news for savers as they are finally starting to see some risk free returns on their money in the bank. Furthermore, new Fed Chair Jerome Powell testified on Capitol Hill and suggested that there will be 3-4 more hikes this year. That means that we may see 3 percent rates by year end. Powell said, “At the December meeting, the median [FOMC] participant called for three rate increases in 2018,” Powell said. “Now since then, what we’ve seen is incoming data that suggests a strengthening in the economy.”

Fed's zero interest rate

We have viewed the Fed's zero interest rate policy (ZIRP) as deflationary as it is in essence a hidden tax burden on all citizens and institutions. Instead of paying interest on deposits, banks were able to keep that money as profit. We felt that the longer this policy persists, the longer the nation’s economic growth will be subpar and possibly worsen. Therefore, we view rising rates as a positive as they are coming off extremely low levels. While higher rates could provide a headwind for the stock market, as long as the economy is strong, the stock market will likely continue to grind higher. As you can see in the chart above, rates increased from 2004-2006 and that didn't affect the bull market in stocks.

“High Interest Rate” by cafecredit is licensed under CC BY 2.0

By Chris Wang