Is there a more anticipated, and perhaps dreaded, non-event than this Federal Reserve interest rate hike. It reminds me of a child’s dental appointments. The event ends up being less traumatic than the child’s imagination would have them believe.

Interest rate hikes affect us two ways. The first way is in the emotional reaction, similar to the dental appointment situation. Investors who still remember the late ’90s recall crouching around the TV and MSNBC, awaiting the drama of an interest rate change. The perception was “interest rates down, good for my portfolio; interest rates up, bad for my portfolio.”

However, the facts are quite different. Consider the last time the Fed announced a well-anticipated rate increase on June 30, 1999. The Dow responded by jumping up 1.4% that day. Even when the Fed followed up two months later with another rate hike, the announcement had little effect on the market.

Looking back at the last thirteen Fed rate hikes (to February 1994), the up days barely outnumber the down days—seven to six, according to research published recently in the New York Times (6/27/04).

The second market effect is that the Fed’s short-term interest rate changes can influence the overall economy. Those prone to quiver with fear at the prospect of higher rates (á la 1994) should bear in mind that the Fed can raise rates to halt a runaway economy—think big truck halfway down a long hill with a full head of steam—by jamming the brakes. A safer and smoother ride can be had by putting the brakes on at the top of the hill, keeping our truck (the economy) in check. That’s the case here, as the Fed is simply taking back some of the insurance it provided to the market after 9/11 and the deflation scare.

Today, deflation is dead, inflation is mild, the economy is picking up steam, and for all intents and purposes, the markets have priced in an increase of 50 basis points. And, despite Greenspan’s pronouncements that the Fed would move at a “measured pace” to raise rates as necessary, the stock market has continued to go up.

Even with the 25-basis-point increase, interest rates are still at some of the lowest levels in the past forty years. The bond market has priced in this rate hike, and the latest retail data from the largest chains tell us that consumers spent considerably less during the month of June versus May spending. The high price of travel, food and healthcare, plus a bump in lending rates, looks like brakes being applied at the top of the hill.

To be fair, increasing interest rates carry some risks to the economy and certain individuals. For example, rates that rise too quickly could pop the hot housing market bubble. Higher house prices lead to an increase in the “wealth effect,” which encourages consumers to spend more. Businesses borrowing at rates tied to prime will experience slightly higher costs. Individuals carrying credit card debt tied to prime as an index will pay more. Adjustable rate mortgages indexed to short-term rates will see increased monthly costs.

But the real threat to both consumers and businesses is inflation. The rates set by the Fed do not directly set the long-term bond rates that act as the barometer of inflation in the economy. The markets set those rates. For a hint about long-term outlook for inflation, watch the ten-year U.S. Treasury bond. If the markets keep the yield where it is or move it lower, the outlook is positive for low or little inflation. Rising yields would signal the reverse.

Though, past performance is not indicative of future results.