Yesterday the US central bank raised its base rate – the federal funds rate – to 1% continuing the move away from a ZIRP (zero interest rate policy). While exceptionally low by historical and absolute standards 1% is clearly the start of a larger tightening cycle.
Intuitively one expects more expensive credit to be a negative for equities. So why the rally? It is all about context:
That said, there is perhaps an ‘unknown unknown’ in the current story: will the unwinding of quantitative easing proceed in an orderly manner?
While there have been bouts of QE since 2007-2008 there have also been several taper tantrums. This time the fact, rather than the prospect, of a rate increase has been embraced.
So far, anyway. The past is a guide not a guarantee.