The Federal Open Market Committee (FOMC) meeting today (Wednesday, March 15) will likely end with the Fed raising interest rates for the first time in 2017.
With a 100% probability of a rate hike, economists have been certain of an increase for weeks now. That's because last month's jobs report crushed expectations by 17.5% and the inflation rate currently hovers at 2.5% -- the highest since 2012.
Interest rates are important because they trickle down through all levels of the economy. That means they also trickle down into the stock market, which can leave investors uncertain about how higher rates affect their money.
Here are three things that could happen following the Fed rate hike today...
Stocks Could See Short-Term Volatility After the FOMC Meeting Today
While a rate hike doesn't directly affect the Dow Jones Industrial Average and S&P 500, it can impact trading behavior. Investors and traders who are uncertain about the rate hike's economic effects could panic and engage in a short-term sell-off.
This happened after the December 2015 rate hike. After the Fed raised rates on Dec. 16, 2015, for the first time in a decade, the Dow Jones took a sharp plunge. The index dropped 8.3% from Jan. 1, 2016, to Feb. 12, 2016.
But again, that was just a short-term dip. Both the Dow Jones and S&P 500 have soared 28.9% and 26.2%, respectively, since Feb. 12, 2016.
This makes it clear that interest rate hikes won't hurt the market in the long run, even if the Fed decides to raise rates two to three more times this year. And because today's rate hike is all but expected, any sell-off would be muted.
That ties into the second potential effect of a Fed rate hike today. This is arguably the most important piece of data the Fed will release today - and it can be summed up in one chart...
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A New "Dot Plot" Could Have a Long-Term Influence on the Stock Market
Although there will certainly be a rate hike today, investors will be looking to see how many more rate hikes the Fed has up its sleeve in 2017. This will be outlined in the FOMC's updated "dot plot."
The "dot plot" is the Federal Reserve's chart that indicates how many times it hopes to hike rates both in 2017 and in coming years. It was last updated after the Fed raised rates in December 2016.
This is the December 2016 dot plot, showing the rate hike projections among Fed leaders (represented by each dot) through 2019 and beyond...
The newest dot plot will be published today after the FOMC announces the interest rate hike at 2 p.m. today.
Finally, the Fed meeting today could also have a major impact on precious metal prices. Here's why gold could soar in the long term following today's announcement...
Gold Could Begin a Years-Long Bull Run After the FOMC Meeting Today
If history is any indication, the price of gold could see a huge long-term rally through this new high interest rate environment.
For most of the 1970s, the U.S. interest rate was above 5%, which dwarfs the current 0.5%-0.75% rate. Since dollar-priced commodities like gold typically decline when interest rates are up, you'd think the gold price would plummet during this decade.
That didn't happen at all. In fact, gold ended up being 24 times more expensive in 1980 than it was in 1970.
Although the interest rate hike in December 2016 boosted the U.S. dollar, the dollar should eventually move slightly lower and stabilize. Regardless, the gold price could soar through any era of rising interest rates.
But it's important to note that a rate hike could drag gold prices lower in the short term. Just like with stocks, gold investors could go into panic mode and sell off due to heightened uncertainty following the announcement.
We still expect gold to remain a great long-term investment thanks to its hedging capabilities. In fact, our newest gold price prediction sees the metal rising 16.8% from its current $1,199 price to $1,400 by the end of 2017.
The Bottom Line: Today's widely anticipated rate hike will have a widespread impact on the economy and the stock market. While it may drag stocks and gold lower in the short term, both will remain strong over the long term, even if the FOMC increases its projected number of rate hikes this year.
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Alex McGuire is an associate editor for Money Morning. Follow him on Twitter.
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