The Fed Hiked a Quarter Percent: Now What?

So here we have it – the first rate hike in nearly a decade.

The Fed hiked rates a quarter point on the federal funds rate in a unanimous vote. This is the overnight rate member banks get when they need to borrow to meet reserve requirements. Dropping that little pebble in the pond ripples across the U.S. Treasury curve and really all other interest rates.

Since the market was expecting this increase, Treasury bonds, notes and bills had already priced it in, so there wasn’t much of a move after the announcement.

The statement said any future increases will be gradual, and you know what that means: don’t look for another hike anytime soon. The stock market moved sharply higher on that news.

What is a bit interesting is that the Fed adjusted their projections for inflation down and don’t expect to hit their 2% target until 2018.

They’re confused why inflation hasn’t picked up more with their easy monetary policy over the last seven years, either because they don’t see the deflationary forces we do, or they know they can’t admit to them. So Fed Chair Janet Yellen says it’s been pulled lower by temporary influences like lower energy prices.

But before we go forward, I want to give you a little background about the Fed and why this particular meeting was so crucial, besides obvious reasons.

The Fed schedules eight Federal Open Market Committee (FOMC) meetings per year.

In them, they review economic and financial conditions…

Determine the appropriate stance of monetary (interest rate) policy…

And reassess the risks to their long-term goals of price stability (inflation) and sustainable economic growth.

The FOMC consists of twelve voting members. Seven members are the Board of Governors of the Federal Reserve, plus the president of the Federal Reserve Bank of New York. The other four are rotating seats with a one-year term, who are presidents from other regional banks.

Every other FOMC meeting, the Fed Chair gives a press conference and the Fed releases updated projections.

Today’s meeting was one of those occasions.

The projections are for short, medium and long-term periods for GDP growth, unemployment rates, and the price index for personal consumption (PCE) inflation, as well as projected federal funds rates.

It’s after these press conference meetings, like today’s, where there’s more chance of surprise.

The statement itself usually leaves little to misinterpret. But sometimes financial reporters will squeeze some information from the Fed chair that wasn’t meant to be said – which can sometimes point to future policy decisions.

Any insight there can move the markets. However, the current chair, Janet Yellen, is good about keeping her opinions to herself and just talks in generalities about what they have decided as a group. She never lets on as to whether there was some disagreement among the voting members.

So when a reporter asked if the Fed simply raised rates to sustain their credibility, Yellen kept her ground. And when another asked about the possibility of another recession, she responded with hypotheticals and vague generalities.

Going into today’s decision, the Fed was widely expected to raise rates. Keep in mind, though, there was a massive amount of positioning ahead of the meeting. Investors are not only positioning for what they expected at this meeting but for future meetings.

Of course, Yellen didn’t give any clue as to when to expect a future hike, which creates a lot of uncertainty among those betting investors, and will magnify volatility going forward. That’s especially the case if global headwinds heat up, or if future economic reports show a cooling economy.

Lance Gaitan

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Categories: Central Banks

About Author

Lance Gaitan graduated from Franklin University in Columbus, OH with a degree in Finance. After graduating and working as an auditor for an insurance administrator as a number of years, he attained his securities license. He then went to work as a broker for a small firm and during the mid-1990’s Lance managed the futures trading desk for Piper Jaffray, a large regional brokerage firm based in Minneapolis. After migrating to Florida in early 2000, Lance founded a futures trading firm, GSV Futures, specializing in retail commodity trading strategies. Lance sold that business in 2006 and joined Harry Dent, Jr. and Rodney Johnson at Dent Research shortly thereafter.