Market Update: March 15, 2017

Economic conditions continue to move closer to the Federal Reserve’s two objectives - full employment and 2% inflation.

As expected, the Federal Reserve today increased the target Fed funds rate by 25 basis points to a range of 0.75% to 1.00%.  In the written statement and accompanying Q&A session, the Fed cited the following:

  • Economic activity is continuing to expand at a moderate pace
  • The labor market is adding jobs and maintaining a stable unemployment rate
  • Household spending continues to rise and business investment has firmed somewhat
  • Inflation has increased somewhat moving closer to the Fed’s 2% target
Looking ahead, the Fed forecasts two additional rate hikes in 2017, ending the year in a range of 1.25% - 1.50%.  Additionally, the Fed is anticipating three rate hikes in 2018, ending the year in the range of 2.00% to 2.25%.

Fed Chair Janet Yellen estimated a neutral rate of approximately 3%, just 1% above the Fed’s inflation target.  With the Fed’s own forecasts, we are targeted to reach this neutral rate by the end of 2019.

The evidence for steady economic improvement has mounted such that we are updating our view for monetary policy in 2017. The job market looks robust and we are encouraged by the uptick in average hourly earnings and in the labor force participation rate. These trends bode well for consumer spending. Also, we’ve been watching for signs of new capital spending. Today, the Fed pointed to modest improvement in business investment which further brightens the economic outlook. 
Therefore, we now expect a total of three interest rate hikes in 2017. 

Lastly, the Fed discussed its sizable balance sheet of U.S. securities.  They plan to continue to reinvest both interest and maturing principal. Going forward, however, the Fed did discuss a gradual and predictable downsizing of the balance sheet. This is another area our Fixed Income team will be monitoring.

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