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Why a .25 rate hike matters to the market: Strategist
As market watchers try to anticipate when the Federal Reserve will raise interest rates, there has been some debate as to whether the .25 hike will have a real impact on the market.
According to Miller Tabak equity strategist Matt Maley, it will not only raise some of the costs for businesses, it will also have an impact on the supply and demand in the stock market.
For one, it will affect corporate stock buybacks, he said in an interview with CNBC's " Power Lunch " on Tuesday.
"Most of these buybacks have been fueled by debt, and as the rates go up, the cost of buying back those shares is going to move up," he explained.
In fact, after the central bank increased rates in December, the new announced buybacks for the first four months of 2016 went down by 50 percent, said Maley.
The other part of the equation is the huge amount of leverage currently in the market. While the economy hasn't improved much since 2011, margin debt in the New York Stock Exchange has gone up 93 percent since the fall of 2011, he pointed out.
"As the cost of that margin gets higher, that will have to be unwound and that will again put a little pressure on the market."
Last week, Fed Chair Janet Yellen said a rate hike is "probably appropriate" in the coming months if economic data improve. The Federal Open Market Committee said during its April meeting that the increase could come in June. The policymakers meet on June 14 and 15.
Maley believes the market hasn't discounted the impending rate hike because high frequency and algorithmic trades don't kick in until the increase takes place. That's what happened in December, he said, when the market actually rallied at some points that month and then started to sell off after the hike occurred and costs went up.
—CNBC's Jacob Pramuk contributed to this report.
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