The federal Reserve raised interest rates by 0.25% this week, its first increase in more than three years. Normally, higher rates aren’t something investors celebrate. But as we have said before, what matters isn’t just where rates are going, it is why they are going there.

In this case, the economy is not falling apart. In fact, economic growth, consumer spending, and capital investment have remained surprisingly resilient. The Fed raised rates because inflation remains too high, not because it sees a recession around the corner. That distinction matters.

One of the bigger contributors to the inflation problem is something we have discussed several times this year: oil. The war with Iran has pushed oil back above $100/barrel, increasing the cost of transportation, manufacturing, and ultimately many of the things we buy. Higher oil prices have also helped push bond yields higher and contributed to the Fed’s decision to raise rates.

The interesting part is that this source of inflation could also reverse. An end to the Iran war would not necessarily guarantee lower oil prices, but removing the geopolitical risk and easing supply disruptions could put significant downward pressure on crude. Lower oil would then work its way through the economy, potentially reducing inflation pressure and, eventually, some of the pressure on the Fed to keep raising rates.

For now, one 0.25% increase doesn’t materially change our investment outlook. Corporate earnings remain strong, AI-related capital spending remains robust, and the economy continues to grow. What would concern us is oil remaining above $100 for an extended period, inflation spreading beyond energy, and the Fed being forced into a much longer series of rate increases. That would be a very different environment.

There will always be something for investors to worry about. Trump, tariffs, wars, AI taking our jobs, or whatever arrives in next week’s headlines. But markets don’t usually get into serious trouble because rates go up once. They get into trouble when inflation forces rates to keep going up.

For now, oil may be the most important interest rate indicator on the screen.

                Source: The Motley Fool

I have also included a piece from our CIBC Economics Team entitled “This won’t hurt a bit”.

As always, if you have any questions, please feel free to give us a call at any time.

Have a great weekend.

Milan