Are Interest Rates Going Up in December?

are interest rates going upAs we head into the final stretch of 2016, with stocks and the economy showing signs of improvement, investors are now wondering if interest rates are going up in December.

The answer is almost certainly, yes. In fact, traders are betting on it...

Market odds of an interest rate hike following the December FOMC meeting on Dec. 13-14 sit at 98.2%, according to CME Group's Fed Watch tool.

The likelihood of an interest rate hike in December has spiked since Donald Trump won the presidential election. Stocks are surging as traders believe President-elect Trump will spur economic growth.

The Dow, S&P 500, Nasdaq, and Russell 2000 all closed at record highs last week. Trump's plans to cut taxes, reduce bank regulations, and spend heavily on infrastructure have all sent markets higher.

But it's not just Trump's victory that may force the Fed's hand at the December FOMC meeting...

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A recent string of data reflects an improving U.S. economy. Manufacturing activity has picked up, durable sales figures are climbing, retail sales are rising, home sales are robust, and America is at or near full employment.

But a rate hike is not a guarantee. There are still multiple data reports expected before the next FOMC meeting. That includes Friday morning's employment report.

Economists are looking for employers to have increased headcount by 180,000 in November, with the unemployment rate holding steady at 4.9%. Another jobs report showing steady and solid job growth could be all the Fed needs to feel comfortable enough to raise interest rates.

Without question, policymakers have been preparing investors for an interest rate hike in December.

Minutes from the November Fed meeting reveal that most central bank members believe it would be appropriate to raise rates "relatively soon provided economic data remains encouraging."

Also, some FOMC members said keeping rates too low for too much longer could move investors to search for yield elsewhere. That could lead to investors mispricing assets like bonds and putting capital where it shouldn't be.

The Fed last lifted rates in December 2015, raising its key interest rate from a range of 0% to 0.25% to a range of 0.25% to 0.5%. It was the first interest rate hike in nearly a decade.

And the aftermath was brutal for markets. Here's what to expect if interest rates are raised in December again...

What an Interest Rate Hike in December Means for Markets

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The Fed's interest rate move last year was widely expected. It was deemed a sign of how much the economy had healed since the Great Recession.

At the time, the Fed telegraphed it would be patient with future rate increases so as not to thwart the economic recovery. The Dow surged 224 points after the announcement, but the gains were short-lived.

Stocks went on to have their worst start to a year ever the following month. The blue-chip Dow Jones benchmark ended January 2016 down 5.5%. The tech-heavy Nasdaq fared even worse, sinking 8%.

So, what kind of impact will a rate increase have on investors and markets this time around?

As was the case last year, a rate hike in December is widely expected and is pretty much baked-in to markets. The initial reaction will likely be that the economy is healthy enough to handle an interest rate increase.

As for what it means longer term, last year's aftermath is proof that investors need to be prepared for the unexpected. Here are our four tips on how to invest following an interest rate hike in December...

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