September was a mixed bag for investors. The S&P 500 was up modestly, as were other developed foreign markets, but small caps and emerging markets retreated. Most investment grade fixed income was negative on the month.
Toward the end of September, the Federal Reserve raised interest rates and signaled a bias toward raising them again in December, which has been widely expected by the market. What’s more interesting, however, is what was omitted from this Fed release: the word “accommodative.” By removing this word, the Fed is suggesting that it no longer views its policy as accommodating, but rather as normal.
This uptick in rates is starting to be felt in various rate sensitive parts of the economy – most notably the housing market. It is also being felt in currency markets by the U.S. dollar, which has been strengthening and increasing the U.S. consumer’s purchasing power. Will the Fed keep going until they break something in the economy, or will they pause and reassess sometime in the new year? No one, not even the Fed itself, seems to know for sure.