At their December 14th meeting, the Federal Open Market Committee raised the federal funds target rate to between 0.50% and 0.75%. The 25 basis point increase was widely expected by financial market participants. Senior Federal Reserve officials’ revised their projections for future rate increases. There’s still a wide range of opinion, but the median forecast for the number of rate hikes in 2017 edged up to three (versus two in September). Raymond James’ Chief Economist Scott Brown cautions investors that the dots in the dot plot are not a plan. They are but an expectation. Actual Fed policy moves will depend on the economic data, with a focus on the job market and the inflation outlook.
After extraordinary monetary stimulus, many view the fact that rates are headed higher, albeit gradually, as a sign of the Fed’s confidence in the job market, the pace of inflation and the “remarkably resilient economy,” which Fed Chair Janet Yellen acknowledged in Wednesday’s press conference. The Federal Reserve’s move appears to be largely factored into the financial markets. And domestic equity markets seem agreeable to the idea. For now, the equity markets are on an upward path with the Dow Jones Industrial Average within reach of an all-new high of 20,000. Speculation has it that scaling back regulation and expansionary fiscal policy could drive earnings growth. Yields on long-term Treasuries moved up and the dollar strengthened. Oil is also showing signs of strength.
The vote on Wednesday was the first time the Fed chose to raise rates this year and only the second since 2006. Brown maintains that investors shouldn’t see a great deal of change after this rate hike either. Deposit rates generally lag behind the Fed’s changes. Of course, longer-term rates, such as mortgages, should move up but Brown expects the rise in bond yields to be checked by low long-term rates abroad. Bond investors should be reminded that while rate increases do have an inverse relationship with bond prices, the reality is much more nuanced. Long-term investors recognize that carefully selected fixed income instruments are a valuable component of a diverse portfolio, providing capital preservation and income in any rate environment.
With the uncertainty about rates and the election cleared, investors may shift their focus to the outlook for 2017, which is likely to include additional fiscal easing. Chief Investment Strategist Jeff Saut remains bullish (his models suggest domestic indices will climb higher into late January or early February).
As always, we’ll be sure to keep an eye out for factors that could influence the markets, particularly paying attention to future fiscal policy, proposed legislation and tax changes, the strength of the U.S. dollar, earnings growth, global economic growth and geopolitical news. I will, of course, continue to monitor the latest market and economic news and share with you the most relevant updates. In the meantime, please feel free to contact me if you have any questions or would like to schedule a year-end review. I look forward to speaking with you.
Andrew Locke, CPA
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