Fed Announces Rate Hike
As the U.S. economy and the stock market continue to see sustained growth, the Federal Reserve has elected to increase the interest rates once again. Just as in December, the latest Fed rate hike is quite conservative: an increase of 0.25%, to a range of 0.75% to 1%. As indicated in the chart, the rates remain historically low.
While the Fed’s decision to move forward with another modest rate hike was not surprising, the more consequential aspect of this story is their intention to gradually increase the rates over the next several years.
The below dot plot illustrates the interest rates that have been projected by each of the 17 Federal Reserve policy board members.
The majority of policy board members said they believe the interest rates should be increased to a range of 1.25-1.5% by the end of 2017 – indicating that we could see two or three more rate hikes before the end of the year. By the end of 2019, the Fed policy board anticipates an interest rate of about 3% – a considerable increase from the current rates, but a fairly moderate rate when compared to historical levels.
The latest interest rate projections are consistent with the Fed’s December projections, reflecting the Fed’s overarching goal of tying future rate increases to U.S. economic progress.
How Does the Rate Hike Affect You?
The rise in rates is good news for those who believe that the Fed has intruded on normal market forces by suppressing interest rates much longer than could be considered prudent, and even better news for people who are bullish about the U.S. economy.
However, bond investors might be less enthusiastic, as higher bond rates mean that existing bonds lose value. The recent rise in bond rates suggests that the bull market in fixed-rate securities may finally be waning.
The impact on stock investors is more complex. Bonds and other interest-bearing securities compete with stocks, in the sense that they offer stable returns on your investment. As interest rates rise, some stock investors could be inclined to move a portion of their investments into the bond market – reducing demand for stocks and potentially lowering future returns.
As the Fed contemplates more rate hikes in 2017 and 2018, our family team of advisors will continue to closely monitor the market and offer recommendations that reflect your current situation and future objectives.
