Fed Raises as Expected, Markets React to Hawkish Outlook for 2017 and Beyond

Fed Raises as Expected, Markets React to Hawkish Outlook for 2017 and Beyond Today’s 0.25% rate hike by the Federal Reserve has been anticipated for months and was no surprise. Note that this is the only rate hike for 2016, and the second in 10 years. Markets reacted to the Fed’s accompanying statement predicting 3 hikes in 2017 (3 months ago, they predicted only 2). Could this be due to a more inflationary outlook post-election? The Fed is seeing some tightening in labor markets, with regional Fed reports indicating labor shortages in some districts. The Fed also raised their long term interest rate outlook, whereby it predicts the “stabilized” interest rate in 4 years. In 2012, this predicted rate was 4.25% and the Fed has been lowering this projection over the years; but today it raised it 0.25% to about 2.90%. This meeting has the Fed being seen in a new light as the economy is translating from central bank-centric monetary policy (gridlocked Washington) to highly anticipated fiscal policy (broad infrastructure initiatives and comprehensive tax reform). When’s the next increase? Futures markets are anticipating a June 2017 increase, giving Congress and the new Administration time to enact policy in the spring. The “big question” is can the economy still grow with the burden of higher interest rates after 8 years of tepid growth despite near zero interest rates, or can the “new normal” transition into anything resembling “normal”? stay tuned.     David R. Pascale, Jr.