What the December Fed Rate Hike Means for Investors

December Fed rate hikeAs many predicted, the December interest rate hike was announced during the Fed meeting today. After all the anticipation, the Fed increased its target rate by a quarter of a percentage point (0.25%). So how will it affect investors?

The Fed's December rate hike signaled the central bank's confidence in the U.S. economy. After reviewing its key economic indicators, including unemployment, inflation, and its measure of the global economy, the Fed was satisfied enough to raise rates.

Keep in mind, a 0.25% rate hike is small and would only bring up the federal funds rate to a little over 0%. The Fed's last quarter-percentage-point rate hike was in June 2006 to 5.25%.

The Fed has kept interest rates close to zero since December 2008, when it lowered rates to combat the Great Recession. Still, many believe the December Fed rate hike could have been better timed.

The energy sector is ailing from the global oil supply glut, which is hurting the junk-bond market. Central banks in Europe are currently lowering their rates, which creates a divergence between their monetary policies and the Fed's. The labor force participation rate - at 62.6% - is also lower than it was before the Great Recession.

So far, Wednesday's decision hasn't panicked investors, as some doomsayers predicted.

How the December Fed Rate Hike Affects Investors

The December rate hike won't have much of an effect on stocks, according to Money Morning Capital Wave Strategist Shah Gilani.

Equity investors have already been expecting a rate hike for some time. In fact, the stock market has actually adjusted to reflect investors' anticipation. Markets were pricing in an 83% chance of a rate hike on Monday, according to MarketWatch. [Related: Best Investments to Own for a Fed Rate Hike.]

Now, some investors may see the December Fed rate hike as a way to make bets against the market, but there won't be a huge stock sell-off. That means most institutional investors will play it safe, especially in the short term.

The Fed is also expected to increase rates slowly to 1% by the end of 2016, according to Gus Faucher, senior macroeconomist at PNC Financial Services Group. That pace is slow enough to ensure equities won't be quickly shed by investors.

However, the commodities market will see a bigger impact from the December rate hike. As interest rates rise, the dollar appreciates, which makes buying dollar-denominated commodities more expensive. This lowers the demand and prices for commodities like gold and silver. The slow rise in rates, however, will weaken this effect [Related: What’s Next for Silver Prices Following Fed Rate Hike.]

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The fixed-income market may also take a hit. Investors will see some minor loses on their principle if yields rise, particularly on long-term bonds.

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