US Fed interest rate hikes may flummox newbies and old hands alike

London

TRADERS often burn out, or cash out, while they are still relatively young. Consequently, not many of today's workers were on the scene in 2006, when the US Federal Reserve last raised its policy interest rate. Some employers are offering on-the-job training as a substitute for experience. Others might study history for themselves. Unfortunately, neither experience nor knowledge of the past is likely to be a reliable guide to the future.

To start, asset prices may not react in the same way as in the past to monetary tightening. Years of abundant and ultra-cheap central bank money have lowered yields on bonds and made equities more expensive. In the quest for higher returns, investors have ventured into riskier assets and bought bonds with longer maturities. As a result, all sorts of risk premiums have been depressed. These distortions will presumably be ironed out as Fed chair Janet Yellen raises rates. But no one can know how fast, how much, or in what order.