Why investors aren’t worried about likely Fed hike

If the U.S. Federal Reserve raises rates tomorrow, markets won’t be surprised. After all, as of 9:30am on March 14, CME Group’s FedWatch Tool indicated there’s a 93% chance of a hike, based on the prices of its 30-Day Fed Fund futures.

Further, the response from investors has been something akin to a yawn, reports Martin Crutsinger of The Associated Press.

He adds Wall Street appears to be focusing on the stock market rally that began in November, on the back on President Trump’s election win. Also, it seems Fed watchers are more buoyed by expectations for a vigorous economy than worried about whether slightly higher rates might slow growth.

When Chair Janet Yellen and several other Fed officials separately suggested earlier this month that the economy was sturdy enough to withstand a modest raising of loan rates, investors quickly raised their estimate of the probability of a rate hike at the Fed’s meeting this week from around 20% to 80%.

Read: Be skeptical of all the Fed hype

After Friday’s robust February jobs report–which pointed to 235,000 added jobs, solid pay gains and a dip in the unemployment rate to 4.7%–the likelihood has grown to 95%, according to the CME Group.

No one is concerned because “we’re just at a different place now than in 2013, when there was a lot of angst and uncertainty about the economy’s prospects,” said Mark Zandi, chief economist at Moody’s Analytics. “Now, the fundamentals of the economy are much better. We are close to full employment and investors feel more comfortable about where we are.”

In light of Friday’s jobs report, optimism about Trump’s economic program and other signs that growth may pick up, some economists said they were raising their forecast for the number of rate increases this year from three to perhaps four.

“I think a March rate hike is a fait accompli,” said Sung Won Sohn, an economics professor at California State University, Channel Islands, who expects four rate increases in 2017. “The more important question is: How many more hikes they will give us for the balance of the year?”

If the Fed is no longer unsettling investors with the hint of a forthcoming rate increase, it marks quite a change from the anxiety that prevailed after 2008, when the central bank cut its key rate to a record low and kept it there for seven years. During those years, any slight shift in sentiment about when the Fed might begin raising rates was enough to move global markets.

These days, the economy is widely considered sturdy enough to handle modestly higher loan rates. The unemployment rate is below the 4.8% level the Fed has deemed an indication of full employment. And inflation, which had stayed undesirably low for years, is edging near the 2% annual rate that the Fed views as optimal.

And, while the broadest gauge of the economy’s health (GDP) remains well below levels associated with a healthy economy, many analysts say they’re optimistic that Trump’s proposed tax cuts, infrastructure spending increases and deregulation may accelerate growth. Those proposals have lifted the confidence of business executives and offset concerns that investors might otherwise have had about the effects of Fed rate increases.

Read: Potential winners of U.S. corporate tax cuts

But if Trump’s program fails to survive Congress intact, investors may start to fret about how steadily higher Fed rates will raise the cost of borrowing and slow spending by consumers and businesses.

The Fed typically raises rates to prevent an economy from overheating and inflation from rising too high. But throughout the Fed’s history, its efforts to control inflation have sometimes gone too far by slowing borrowing and spending so much as to trigger a recession. Already, the current expansion, which officially began in June 2009, is the third-longest in the post-World War II period.

“The Fed is really just normalizing rates now and not tightening credit,” said David Jones, chief economist at DMJ Advisors. “But if the Fed hikes three or four times this year, the rate increases [could] start to bite and investors might start to worry about whether the Fed’s credit tightening could get in the way of Trump’s stimulus program.”

Read: Fed may move to faster rate hike cycle, says analyst