FOMC Increases Fed Funds Rate

December 14, 2016
Federal Open Market Committee (FOMC)
 
The Fed increased the range on the federal funds rate
  • To (0.50% - 0.75%) from (0.25% - 0.50%)
  • This was the first rate hike since December 2015 and keeps the federal funds rate in a range
Language Changes and Themes
  • The Monetary Policy release was more hawkish than previous releases and emphasized the pace of rate hikes will be faster than the market had anticipated
  • Three hikes are expected in 2017, followed by three more in 2018
  • The Fed expects to see inflation rise more than previously thought
  • Labor market conditions continue to improve with unemployment expected to be 4.5% in late 2017
Market reaction
  • Yields have risen across the curve
  • Long end of the yield curve flattened but not dramatically
  • Equities sold off
 
Conclusion:  The rate hike was in line with our expectations. Relative to their benchmarks, the LIM portfolios were positioned to benefit from a rate hike. Any future decision on rate hikes will continue to be highly data dependent. However, the Fed’s base case is to implement a steady rate rise throughout the next year culminating in the 1.25% to 1.50% range by the end of 2017. If growth is stronger than expected, the Fed will move more aggressively to increase rates. Conversely, if there is a shock to the system which causes a flight to quality, then we expect the Fed to delay future rate hikes until the markets normalize.
 

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