Strong Tower

New Fed rate hike market reaction?

The past couple of years witnessed more speculation about interest rate hikes by the Federal Reserve than what was the reality. Many of the pundits were convinced we would see four increases during 2016 and they were wrong. The thinking has shifted in 2017 as some of the precursors that the Fed considers are starting a align and justify action on their part. A growing economy and real growth in the job market, with the accompanying uptick in inflation, is just the formula the Fed needs to raise rates; really.

Federal Rate Hike Graph

On March 15, 2017, the Federal Open Market Committee (FOMC) raised the federal fund’s rate again by a quarter point; the second such move in three months. They had raised the benchmark rate this past December as well. The two increases are expected to have some effect on short-term lending rates.

This has been a reversal of Fed policy, since the general direction of rates, except for December of 2015, has been down for a decade. In June of 1981, the federal fund’s rate stood at 19.10 percent. The rate had languished near zero for several years and now is in a range of 0.75 percent to 1 percent.

The Fed’s decision was based on improving economic indicators and “reflects the economy’s continued progress toward the employment and price stability objectives assigned to us by law,” said Federal Reserve Chair Janet Yellen.

Those who are institutional investors, who manage other people’s money in mutual funds, pension funds, hedge funds or the unit trusts in annuities, have anticipated a rate increase for more than a year.

For this reason, the most recent two increases have not come as a surprise. These are major investors who can drive markets. Most watch the Federal Reserve very closely, as well as the economic factors that drive the Fed’s decisions. The Fed’s recent move has already been “factored in” by these money managers in their recent investment decisions.

After the Fed’s most recent increase, the Dow Jones industrial average increased by 113 points. The other reactions were that long-term Treasury yields fell and the dollar weakened. The Fed’s comments about their current outlook were mostly positive for investors; modest rate increases the rest of the year and good economic performance since last December.

Famous bond investor, Bill Gross, says that the Fed’s approach is less “hawkish” and this is a good thing. He says the market is expecting an “old usual economy,” meaning more normal growth in GDP. He also says that money coming into U.S. treasuries is coming from Europe, the UK and Japan.

Alongside the Fed’s positive remarks are projections of a more robust economy in 2018 or 2019 resulting from current tax and spending legislation proposals.

The Fed has forecasted that they anticipate two additional increases during 2017. This is more than the forecasts from last year because the economic indicators are in a better place. A strengthening labor market and increased business investment are two factors that have influenced their decision.

Some more recent drops in the market have been blamed on health care reform, bank stocks, financial stocks and retail stocks. The price of oil factors in as well. The Fed’s actions have not had a major impact though.