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Fed Meets Expectations, Bond and Stock Markets Rally

Today’s quarter point rate hike and accompanying statement/press conference was a perfect “Goldilocks” moment.   The actual hike was “fully priced in” by markets with Fed Futures indicating a 93% probability.   The “action” was in the indications of future rate hikes.    Markets were hoping for a gradual and steady pace and the Fed delivered by indicating two more hikes this year and three in 2018.   This was in line with expectations and dovetailed well with recent bullish economic news, especially consumer and housing confidence.    The Fed’s confidence in the US economy is welcome news to investors and also reassuring to bond market inflation hawks that want interest rates to be “in front” of inflation.  The 10 year Treasury saw a major “relief rally” with yield dropping from 2.60 to 2.50%.    Bond investors also were reassured by a comment from Fed Chair Yellen regarding the Fed’s massive balance sheet, now at $4.5 trillion.  (Note that “normal” level pre-crisis was about $1 trillion).   Yellen indicated that the short term rate remains “the key active tool of policy” and there are no plans to sell off Treasuries and MBS bonds being held by the Fed.   Such a sell off would have been considered a “stealth rate hike” as the new supply would no doubt affect bond yields.    The Fed also got out ahead of potential rocky international news with potential unpredictable election results on tap for late spring out of France and other major Euro economies. stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners.

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