Large-cap stocks are down nearly 3% for the year. As of Jan. 6 the Standard & Poor's 500 is down 2.62%, and the Dow Jones Industrial Average is down 2.98%. Losses in the materials sector have led the year’s descent with the S&P materials sector down 4.19% led by losses from Alcoa (AA, Financial) down 12.77%.
While the FOMC raised its federal funds rate 0.25% for the first time in seven years, it seems the effects on the equity market have been minimal. Since the Federal Open Market Committee’s Dec. 16 rate increase, the S&P 500 is down 2.60%, and the DJIA is down 3.52%.
On Tuesday, the FOMC released its meeting minutes for the Dec. 16, 2015, meeting that gave further insight into its decision to raise rates and its intentions for future rate increases. The timing of December’s rate increase follows significant improvements in the labor market and an improved outlook for GDP. The U.S. unemployment rate has fallen to 5% and details from the FOMC’s December meeting indicate that GDP is “increasing at a moderate pace.” Price inflation, however, still appears to be a main concern for the FOMC.
In its meeting statement and subsequent meeting minutes, the FOMC did not give a specific outline on its plans for future rate increases, noting that further increases were likely to follow as the committee seeks to holistically normalize policy. The pace, however, will likely be gradual, given that price inflation continues to be a key area of reticence.
In its December meeting the FOMC’s associated projections showed four committee members formulating the lower bound of the projections at a midpoint of 0.875% in 2016. Given the committee’s projections for 2016, the federal funds rate could then increase to a range between 0.75% and 2.25% in 2016. Consistent with the committee’s communication, the FOMC will likely continue to raise rates over the next three years to potentially as high as 4.125%.
With committee members pushing the rate to as high as 2.25% for the year, each of the meetings in 2016 has potential for a rate increase. The year’s market open has included volatile trading specifically from questionable economic growth in China, weakening currency levels in China and lowering oil price levels, all factors of which the Federal Reserve has noted it will be cautious, thus a further increase in January appears to be unlikely. Many market speculators now expect the next rate increase to be in March with the general market consensus expecting four rate increases overall in 2016.
