The Fed Raises. Now What?

In a surprise move, the Federal Reserve raised the discount rate by a quarter point to 0.75% after the market close today.

Expect many market pundits to pooh-pooh the rate increase.  That is a mistake.

From 1945 to 1998, at the bottom of a typical bear market bottom, rising interest rates were positive for stocks as rising rates indicated an improving economy and increasing demand for credit.

However, this is not the same economy.  The current economy is not driven by the typical inflation/inventory cycle that marked the post-war economy, whereby the Fed increased or lowered interest rates depending on excess or slack demand and supply.  This economy is dependent upon asset markets, and the government's ability to support asset markets.

This does not mean that the market is for certain going down.  What it means is that comparisons to past markets are false. 

The market rebound off the March lows has been driven primarily by the enormous and unprecedented amount of liquidity unleashed by the government which subsequently flowed into asset markets.  The government is now beginning to withdraw that liquidity.   This is a decided negative for asset prices. 

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