Rates rise, sky doesn't fall

Markets today welcomed the Fed's decision to raise short-term interest rates. It's hard to imagine how this tiny move could prove troublesome, but it's not hard to see why the market cheered. At the very least it removes the uncertainty that had surrounded the Fed's ZIRP for many years. It also sends a positive message, since it's the Fed's way of saying they have more confidence in the economy's ability to continue growing. On the margin it makes saving more attractive, and borrowing a bit less cheap (real borrowing costs have been generally low and now they're a bit less low), and there's nothing wrong with that A modest rate hike is supportive of the dollar, and a strong dollar is always preferable to a weak dollar, since it attracts capital and capital is what powers productivity.

The following charts are updated versions of some of my favorites:

The chart above shows the equity market's sensitivity to fear, uncertainty and doubt (as proxied by the ratio of the Vix to the 10-yr Treasury yield). Uncertainty has dropped meaningfully with today's Fed announcement, and that has bolstered the prices of risky assets, as it should.

The prices of gold and 5-yr TIPS (using the inverse of their real yield as a proxy for their price) continue their multi-year downtrend. I've featured this chart for years, arguing that it shows that the market is gradually becoming less risk averse (gold and TIPS are classic safe havens).

Rising real yields on TIPS are also a sign that the market is becoming more confident in the ability of the economy to grow. The market is still quite cautious (on average the real yield on 5-yr TIPS tend to be about one percentage point less than real growth, but as of today it is about two percentage points less), but on the margin becoming less so.

So, a bit of good news as we enter the holiday season.