Today’s chart is relevant because the Federal Reserve is about to begin raising interest rates for the first time since 2004. And I believe that many Americans don’t understand what it’ll mean to them.
Here from LPL Research’s House of Charts, with the maturities on the horizontal axis and the rates on the vertical axis, is a representative treasury yield curve.
When the Fed raises the Federal Funds Rate what they changing is the rate for overnight borrowing, the very shortest part, or the front end of the curve. That’s the only point on the curve that they control.
But if they raise rates, it’ll push the near‐term rates higher, too.
But the longer‐term rates are controlled by the markets. Buyers and sellers of treasury securities bid and offer, much like they with do stocks, based on their individual opinions of inflation and economic conditions.
Because the markets control the longer yields, the Federal Reserve has strong influence only in the short end of the yield curve.
It is possible that short rates could be pushed higher than long rates, inverting the yield curve, and that could be a troubling sign. But, we don’t see that happening any time soon.
So, what will the impending FED Funds Rate hike mean to most of us? Probably nothing at all.
As always, call or email with any questions or concerns.
Source: LPL Research, FactSet 10/26/15
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