Well, they’ve finally done it. 
After months of ‘will they, won’t they’ and the high levels of market volatility which has been ever-present as a result, the US Federal Reserve (Fed) has taken its first steps to normalise monetary policy by raising interest rates by 0.25 per cent on the back of yesterday’s FOMC meeting.
This therefore marks the beginning of the end of a period of extremely loose monetary policy since the global financial crisis and is the first increase in interest rates since 2006.
“This action marks the end of an extraordinary seven-year period during which the federal funds rate was held near zero to support the recovery of the economy from the worst financial crisis and recession since the Great Depression,” Fed chair Janet Yellen said of the decision.
Of course, though, the language surrounding the path of interest rates was still very dovish as though the plan is for four further hikes next year, the word ‘gradual’ has been extensively used by the Fed.
In truth, the large majority of traders (70 per cent, according to Bloomberg) were expecting a hike and while there are still plenty of naysayers who believe this decision to be a policy error, many believe Yellen and Co. should have moved much earlier.
That being said after months of volatility and, at times, significant falls in both bond and equity markets, investors have reacted very positively to the news.
Performance of indices over 3 months
Source: FE Analytics
In fact, global stock markets have been described as a “sea of green” with the S&P 500, FTSE All Share, Eurofirst 3000, Nikkei and Hang Seng all up more than 1.5 per cent since the decision.
Bonds haven’t reacted as well, though, with yields rising somewhat within gilt and US treasury markets and many market commentators warning that this first hike signals the end of a multi-decade bull run in the asset class.
But that’s enough of what has happened. In this article, we round up the reactions of leading industry professionals on the decision and what it could mean for investors.
BlackRock – “Goods news, but expect further volatility”
First up, strategists and fund managers at BlackRock say the first hike is a good sign for the economy and markets, but the group says investors should expect a volatile over the medium term.
“The reality is that, by historical standards, rates are extremely low and are likely to remain so. Indeed, in announcing the hike to a range of 0.25 per cent to 0.50 per cent, the Fed said it expects rates to stay subdued, and that the hiking cycle will be gradual,” BlackRock said.
“Overall, investors should view the rate hike for what it is: good news and a testament to a resilient U.S. economy. Expect ongoing volatility, but remember that while rates are no longer at zero, they remain extremely low, and will likely remain low for some time.”
Old Mutual Global Investors – “Don’t expect rates to rise dramatically”
Christine Johnson, head of fixed income at Old Mutual Global Investors, agrees and says the Fed’s future path for interest rates is likely to be very bumpy indeed. 
“The future path of rates may actually look more like the Wright brothers’ first attempts at flight: sporadic upward bursts, followed by a bump back to earth and then perhaps another short moment of being airborne,” Johnson (pictured) said.
“And there are many gusts along the way for the Fed, including the strength of the dollar, the peaking of the credit cycle – not to mention the essential forces of gravity being exerted by feeble growth elsewhere in the world.”
“As the Fed edges closer to the so-called normalisation of policy, market reactions may not be what you would expect. The central bank’s flight into higher rates may well be short-lived and rather low to the ground.”
Woodford Investment Management – “Forget Star Wars, prepare for currency wars”
Woodford Investment Management’s Mitchell Fraser-Jones says that while the first hike is good for the US economy, the accompanying US dollar strengthwill have profound implications elsewhere.
“Although an increase in US interest rates may be justified for the US economy, it is far from ideal for the rest of the world,” Fraser-Jones said.
“The pace and extent of future rate increases is likely to be data-dependent, and it is plausible that the Fed will be cautious about hiking further in the next few months. But, in our view, tightening liquidity conditions already represent storm clouds for the global economic outlook.”
“So forget Star Wars – it’s the prospect of a new episode of Currency Wars that is occupying our thoughts. The dark forces of deflation and secular stagnation may be about to intensify.”
Hargreaves Lansdown – “The hike is likely to hurt emerging markets”
Ben Brettell, senior economist at Hargreaves Lansdown, strikes a similar tone to Fraser-Jones as he warns the decision is likely to hurt emerging market assets.
“Tighter US monetary policy could have negative consequences outside its borders,” Brettell said.
“Emerging economies in particular could be affected by higher interest rates in the states. Low US interest rates have encouraged borrowing in dollars, and this capital has flowed into emerging markets in search of higher returns.”
“When US interest rates rise, capital flows could reverse, weakening emerging market currencies and making dollar-denominated debts harder to service.”
Rathbones – “This is good news for equities”
On a more positive note, though, Edward Smith – asset allocation strategist at Rathbones – says investors can afford to be positive on equity markets thanks to the announcement.
“Historically, global equity markets tend to do well for at least a year after the Fed sets off on a rate-rise cycle,” Smith said.
“Even in 1994, when Alan Greenspan surprised investors with several rapid unheralded hikes, the S&P 500 closed higher a year later. Taking into account data going back to 1990, the best conditions for equity returns have been when interest rates are increasing and growth is rising. It is wrong to assume that tighter monetary policy means lower equity returns, per se.”
“It’s not the nominal interest rate that matters so much as the gap between the lending rate and the rate of return on capital. A very healthy cushion remains between these two measures, which should support equity markets during the earlier phase of the tightening cycle.”
Royal London & Hermes – “But it could be very bad for bonds”
On the other hand, Ian Kernohan – economist at Royal London Asset Management – says higher interest rates are likely to have painful repercussions for fixed income investors.
“While we agree that the Fed will not want to frighten the horses and will stick to a gradual path initially, the market can often underestimate the pace of tightening in a rate cycle.
“If the labour market data remains robust through the rest of the winter, combined with a further rise in headline inflation, the market may have to revisit its benign view about the likely path of US interest rates.”
“Bond markets would be most vulnerable to such a reappraisal, in particular government bonds, which have enjoyed a multi decade bull run of falling yields.” 
Hermes’ Fraser Lundie (pictured) and Mitch Reznick agree that traditional fixed income assets are now very much at risk.
“Low US bond yields and fears of a market bubble have already called into question the role, if any, that a long-duration credit exposure should play in investors’ portfolios in the coming years,” Lundie and Reznick said.
“This concern is justified: the best indicator of future bond returns, their current yield to maturity, implies returns of 2.2 per cent in the next decade. Now that interest rates are likely rising from the extremely low levels set during the financial crisis, that picture only looks bleaker.”
“Such low prospective returns undermine the ability of long-duration instruments to withstand future market shocks.”
Tilney Bestinvest – “The Fed has moved too late, so investors need to cautious”
The final viewpoint is one of the most bearish as Jason Hollands, managing director of business and communications at Tilney Bestinvest, says investors need to be very defensive in their portfolios given the Fed’s hike is “way too late”. 
“In our view, this move has come way too late. Allowing the tap of liquidity to remain turned on for too long, has allowed the gross misallocation of capital creating valuation distortions in markets and has prevented a normal default and bankruptcy cycle in the real economy,” Hollands (pictured) said.
“Overall, we are cautious on both equities and bonds for 2016 given the risks that have built up, the potential dislocation that might occur as monetary policies diverge between regions and the continued spectre of a slowdown in China.”
“So where should investors park their cash? In the medium term we think investors might take another look at Absolute Return funds that pursue low volatility strategies that are not reliant on directional movements in markets.”
