The Federal Open Market Committee did what many expected: raised the target federal funds rate to between 0.75% and 1%.
It should be noted that senior Fed officials’ projections of growth, unemployment and inflation over the next few years didn’t change much from December. And, only a few Fed officials raised their expected year-end rate targets for 2017 and 2018. Future Fed policy actions will be data-dependent, with a focus on the job market and the inflation outlook. The domestic equity markets were expecting a more aggressive stance on raising rates, but equity investors seem to prefer the gradual move toward normalization of fiscal policy. The measured comments from the Fed helped extend recent gains for all three major stock indices.
The decision to raise short-term interest rates is not necessarily bad news for investors, Raymond James Chief Economist Scott Brown explains. It reflects an improved economic outlook. The latest employment report, for example, showed an uptick in construction and manufacturing jobs, a sign of strengthening business investment. Even with the rate increase, monetary policy remains accommodative. Consumer and business borrowing costs may rise moderately, but the economy is expected to strengthen further over the course of 2017.
The Fed may be on a collision course with policies coming out of Washington, notes Brown. Reduced regulation, a possible infrastructure spending package, and tax cuts should provide some lift for economic growth. In contrast, the Fed sees an economy near full employment. Labor market constraints would keep overall growth at a moderate pace. Of course, as Yellen has noted, the timing, size and character of Washington’s policy changes remain uncertain.
The rate increase was only the third since 2006. Any immediate effects will likely be modest, as they were in December. Banks tend to raise interest rates on loans before raising rates on deposits, so borrowers should see a change first, while savers may have to wait a little longer to see their interest rates rise. Bond investors also may want to take a wait-and-see approach. While bond prices do have an inverse relationship with rate increases, the reality is much more nuanced and interest rates don’t move in lockstep with Fed policy.
Your advisor will continue to monitor the latest market and economic news for events that could affect your financial plan. In the meantime, please contact your advisor if you have any questions.
Investing involves risk, and investors may incur a profit or a loss. All expressions of opinion reflect the judgment of the Research Department of Raymond James & Associates, Inc. and are subject to change. Past performance is not an indication of future results and there is no assurance that any of the forecasts mentioned will occur. Asset allocation and diversification do not guarantee a profit nor protect against a loss. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise.