To the surprise of very few, the Federal Reserve today announced the first federal funds rate hike in nine years. The rate was raised from near zero to a modest 0.25% - 0.50%. The Fed's statement revealed that the FOMC sees the economy improving even though the inflation rate is still below their 2% objective. The FOMC also expressed the optimistic view of the economy continuing to improve with an expectation of inflation rising to 2% over the "medium term". The determination of the timing and size of future rate hikes will depend on "the economic outlook as informed by incoming data", according to the Fed, but they also stated: "The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run." In other words, interest rates should remain relatively low for "some time".
Predictably, today's broad stock market was like a roller coaster ride. The DOW jumped up 159 points on opening, lost all of it by mid-day, surged back up into the 2:00 Fed statement, sank briefly after its release but then recovered dramatically and closed the day with a 224 point gain! Whew! The day's final gain suggests that we may have a classic case of "buy on the news" here and that the markets have already put their fear of a rate hike behind them. Nevertheless, we should let the dust settle a bit after today's wild ride before making any trading decisions. Investors could have a change of heart as the reality of rising interest rates sinks in. If the markets do turn back down over the next several days, we could still see a cycle bottom to buy at the end of December or possibly in mid-January with the DOW moving back below 17,138 and the S&P 500 below 1993. Otherwise, it looks like those Monday lows could be the start of a new medium-term cycle, and the markets will be at least short-term bullish. Still on the sidelines here.
Gold and silver prices were also quite volatile today. Both metals had been falling since last week, presumably in anticipation of the interest rate hike, but today prices rose steeply up into the time of the Fed's press release at 2 PM. After the hike announcement both metals fell (gold very steeply) but then recovered by the end of the day to close with significant gains (gold at $1072 and silver at $14.17). I was betting that the Fed's announcement wouldn't severely damage gold or silver, and (so far) that seems to be the case. The next few days will tell us if gold and silver prices can hold up. If they can, I am still anticipating a rally to at least $1100 in gold and towards $15 in silver. Still holding my long positions in both gold and silver.