A rate hike – what’s that?  

It has been so long since the Federal Reserve has raise interest rates in the US that Banks and Brokerage houses are having seminars for their workers to help them understand the repercussions of a rising rate environment.  If you are working with Mortgage Brokers or Financial Planners under the age of 35 – then it’s very possible that in their entire professional careers, they have never been in an economic environment like this.  Even for the older market professionals and traders, it’s been so long it’s hard to remember.  

The Fed last began tightening rates back in June of 2004 mainly to cool a rapidly rising housing market but also to cool off the “irrational exuberance” in the stock market, as the S&P had gone from 800 in August of 2002 to 1,300 in April of 2006 (up 62.5%) while housing prices had doubled off their mid 90’s lows.  The pace of that tightening was 1% every six months, topping out at 5.25% 2 years later: 

As you can see – it had a bit more than the desired effect on the housing market though housing prices continued to go up all the way into 2006 before completely collapsing almost all the way back to where they were 10 years earlier – a real “lost decade” for home buyers.  Only then did the ripple effects spill out to the stock market and it was the mortgage lenders themselves and the Financial Institutions that traded their collateralized debt that ultimately took the economy down.  

It would seem the Fed has gotten smarter and is not going to even let a runaway housing market get started this time – and that’s a smart choice by them as we sure can’t afford another round of bailouts and the low rates have let most homeowners survive the downturn, albeit without the gains they hoped they would make from their housing investments.