FOMC Increases Fed Funds Rate

March 15, 2017
Federal Open Market Committee (FOMC)

The Fed increased the range on the federal funds rate

  • To (0.75% - 1.00%) from (0.50% - 0.75%)
  • This was the third rate hike since December 2015, while keeping the federal funds rate in a range

Language Changes and Themes

  • The Monetary Policy release remains hawkish and emphasized that waiting too long to raise rates could require more rapid rate increases down the road
  • Pace of rates remains gradual, which indicates 25 bps increments
  • Expectations for two more hikes in 2017 remain in place, followed by three more in 2018
  • The Fed will wait until Congress and the new administration demonstrate they can execute legislation before altering its outlook
  • Inflation is approaching its target of 2%

Market reaction

  • Yields had risen across the curve in anticipation of the hike but rallied on the news
  • The intermediate (3-7 year) portion of the yield curve outperformed shorter and longer maturities
  • Equities rallied

Conclusion: 

The rate hike was in line with our expectations. Relative to their benchmarks, the LIM portfolios benefitted as rates rose in anticipation of the 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 a range of 1.25% to 1.50% 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.

The information provided does not constitute investment advice, is not a recommendation, offer or solicitation to buy or sell any securities, or to adopt any investment strategy and should not be relied upon as such. It does not take into account an individual investor’s particular investment objectives, strategies, tax status or investment horizon. There is no guarantee that any forecasts contained herein will come to pass.  Past performance is not an indication of future results. Investment involves the possible loss of principal. Any opinions contained herein are those of Longfellow Investment Management Co. LLC (LIM) at the time of publication and may vary as market conditions change. It is in the sole discretion of the reader whether to rely upon the opinions contained herein.