FED RAISES RATES AS EXPECTED

FED RAISES RATES AS EXPECTED

Last week’s Rate Increase was expected and baked into markets, all the action was in the statement and pressed by Fed Chair Powell. Powell’s performance was soothing to markets, which easily could have been spooked by the Fed Statement. Highlights from the statement:

(1) Although the word accommodative remained in the statement (a staple since the crisis), the phrase about keeping rates low for some time was dropped for the first time in years.

(2) Four rate increases are anticipated for this year (that means two more hikes, most likely in September and December) with three increases in 2019. Note that one more committee member signed on to the four increases this year.

(3) Economic growth is described as rising at a solid rate instead of moderate; adjustments are now referred to as increases (showing an upward trend in growth and rates is now assumed). The remaining five rate increases in 2018 and 2019 would bring the Fed Funds rate up to 3.25% (up from 2.00% today). That would be slightly above the 2.9% (approx.) assumed neutral rate (the rate which neither stimulates or hampers growth). But today was significant in what didn’t happen: no major market volatility. In recent years, the market would sometimes react to good economic news with contrarian volatility as the formula was good news = potential rate increases = taking away the punchbowl of central banks propping up economies which is therefore bad news. The relatively tepid reaction to today’s positive outlook and rate increase may be showing a more normal economy less dependent on central banks. Tomorrow’s highly anticipated ECB comments on their bond buying program will be closely watched and may continue today’s theme of normalization. Prime Rate is now 5.00% and 30 Day LIBOR is 2.05%, both thresholds last seen in 2008.

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