Recent comments by Janet Yellen have market participants wondering when the first interest rate hike will happen. Many expected it to come at the June Fed meeting. Then, with economic numbers sending questions about how robust the economy really is, now it is thought that the first increase will not be until September. Maybe? The U.S. economy is expected to grow at a rate of around 2.5 % in 2015 and 2016. The rate is not indicative of robust growth however, it is growth. Comments from the Fed have sent the message that if things continue moving along, as they currently are, that a rate increase is imminent. Just the exact date is unknown.
If interest rates are increased later this year, it will be the first rate increase since 2006. Fed Chair Yellen has stated that rate increases will be very gradual. So, when they start, how long will they increase? How high will they go? These are the questions on all investors’ minds. Is this the end of the six-year bull run in the stock market? Typically, when interest rates start their increase, the market drops an average of 2.27% within the first several months, afterward. Some analysts say the market is a bit on the high side currently. The long-term average price-to –earnings ratio on the Standard & Poor’s 500 is 14.8%. The current ratio is 17.6%.
Yellen’s recent comments point to the likely hood of a rate increase this year; however, she reports that the economy still faces headwinds. Which is it? Are we improving or is the economy still weak? It seems that maybe even Janet Yellen is not clear about the answer to this question. We will see what happens shortly; things just sound a bit unclear.