Investors on high alert as the Fed suggests upcoming increases

Investors are faced with a dilemma as a result of the Fed’s hawkish statement, which comes amid a strong stock market rally: how to preserve exposure to rising stocks while also protecting against the potential disruptions tighter monetary policy might bring.

As was largely anticipated, the central bank kept rates steady on Wednesday. However, it startled some markets by indicating that, in response to a still-strong economy and a slower decrease in inflation, borrowing costs will likely climb by another half a percentage point by the end of this year. After the news was released, traders' predictions for peak rates increased.

A recovery in American equities that has seen the S&P 500 soar 24% from its lows last year is thought by many investors to be unlikely to be stopped by an additional 50 basis points in rate rises, should the Fed feel them necessary. Since last year, the central bank has increased rates by 500 basis points and is largely believed to be nearing the conclusion of its rate-hike cycle.

However, some people are getting concerned that tighter monetary policy is raising the possibility of financial system ructions akin to the crisis that resulted in the failure of many prominent banks this year and triggered weeks of market turbulence.

Investors have kept a careful eye on regions that may be particularly susceptible when easy money dries up, despite the fact that the U.S. economy has been essentially robust, the banking system excepted. Commercial real estate is one of the possible weak regions, where a wave of defaults might have an impact on banks, the overall economy, and other credit market sectors.

On Wednesday, the S&P 500 increased 0.1% after fluctuating between gains and losses. Bond yields, which follow prices inversely, increased somewhat. The Nasdaq has increased 30% this year while the S&P 500 has up 15%.

There is, of course, no assurance that higher rates will really cause the economy to falter or that, even if they did, the stock market would suffer irreparable damage. From a low set in March during the financial crisis, the S&P 500 has already risen 14%.

(Sources: investing.com, reuters.com)