Will Higher Interest Rates Ruin the Stock Rally?

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More than five years have passed since the Federal Reserve announced its first round of large-scale asset purchases. The central bank quickly followed the move by implementing a zero interest rate policy. An extremely accommodative monetary stance has been a staple in the financial system ever since. With the latest quantitative easing program on pace to end this year, investors are shifting their focus toward rising interest rates. However, do higher rates indicate trouble for stocks?

It appears the day is finally approaching when the Federal Reserve can stop holding Mr. Market’s hand so tightly. At its first meeting under new Fed Chair Janet Yellen, the central bank continued to dial down its monthly bond purchases by $10 billion. It will add to its holdings of agency mortgage-backed securities at a pace of $25 billion per month and longer-term Treasury securities at a pace of $30 billion per month. If the current pace of tapering continues, the open-ended QE program could conclude in December.

The Federal Open Market Committee said: “The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases.” The changes will begin in April.

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