Dow Climbs After Fed Projects Higher Interest Rates

The Federal Reserve predicted that interest rates will rise in 2015, but that wasn't bad news for the stock market today.

Jun 18, 2014 at 3:30PM

The Federal Reserve ended a two-day policy meeting this afternoon and showed a hint of optimism about the economy. After a slight contraction in the first quarter, the Fed now expects GDP growth of 2.2% in 2014, indicating a pickup during the second half of the year.

The Fed's short-term interest rate, called the federal funds rate, is projected to rise to 1.2% by the end of 2015 and 2.5% by the end of 2016, which wouldn't be the case if more growth weren't expected. When combined with another taper, bringing monthly bond purchases down to $10 billion, the easy money the Fed has provided for the economy is also slowly being shut off.  

Interestingly, the Dow Jones Industrial Average (DJINDICES:^DJI) actually rose after the announcement, which isn't always the case when interest rates are projected to go up. But the Fed's policy has both good news and bad news for stock investors.

Wall Street Bull

Investors took a bullish view of the Fed's policy today.

What this means for stock investors
The end of ultra-low interest rates will eventually mean that it'll be harder for companies to borrow money -- or they'll have to do so at less attractive rates. In theory, that could leave less money for investment or expansion by companies who borrow money.

But we've seen companies pull back on investment and actually hoard cash since the recession, so low interest rates are doing little to push more investment. But a higher growth rate in the U.S. could change that.

One of the reasons companies are hesitant to invest in new products and equipment is that the economy is so sluggish. Hanging on to cash is looked at as a safer use of money than risking it on new investments that may not carry high returns given the state of the economy. So, more growth or a lower level of unemployment -- the Fed predicted a rate slightly above 5% in 2016 -- could give companies a reason to invest.

That optimism is why the Dow Jones Industrial Average didn't sell off after the Fed's announcement today. It'll take time to see whether the Fed's predictions are correct, but for now a higher growth forecast is a small reason for hope.

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Travis Hoium has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

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KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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