Invest in where the rates are going

Federal Reserve expected to raise key rate this week

By

Published:

 

Hockey great Wayne Gretzky credits his dad with telling him to “skate where the puck is going.”

And like many sports cliches, this one has been appropriated by business-types for years. Just because the phrase is overused, though, doesn’t make it any less valid.

Just ask an investor.

There is little doubt where the Federal Reserve’s target interest rate is going in the week ahead — up. And expectations have been rising for more rate hikes in the months ahead.

Bond market interest rates are moving up along with these expectations, pushing bond prices down. The yield on the 10-year U.S. government bond is near its highest level since mid-December. The average 30-year fixed-rate mortgage is at its highest level of the year, according to Freddie Mac. The cost of borrowed cash for auto loans and credit cards also has been rising.

So far, investors have been out ahead of the Fed. The markets have moved and are waiting for the puck. The major stock indices have not experienced significant selling, and the bond market weakness has been very tame by historic standards.

Speaking of history, long-term investors would be mindful to remember the Federal Reserve is a long way away from nudging rates to what anyone can claim to be high. A usual quarter-percent rate hike on Wednesday would bring the Fed target rate to just 1 percent.

For the central bank to be successful in its effort to keep the American economy growing, it needs investors to know where it’s going.