Download Fed surprises few with rate hike At its March 15 meeting, the Federal

 Fed surprises few with rate hike
At its March 15 meeting, the Federal Open Market Committee (Fed) did what many expected:
raised the target federal funds rate to between 0.75% and 1%. The 25-basis-point increase was in
line with market expectations and reflected “the economy’s continued progress toward the
employment and price stability objectives,” according to Federal Reserve (Fed) Chair Janet
Yellen. The central bankers last raised rates three months ago at their mid-December meeting.
It should be noted that senior Fed officials’ projections of growth, unemployment and inflation
over the next few years didn’t change much from December. And, only a few Fed officials raised
their expected year-end rate targets for 2017 and 2018. Future Fed policy actions will be datadependent with a focus on the job market and the inflation outlook. The domestic equity markets
were expecting a more aggressive stance on raising rates, but equity investors seem to prefer the
gradual move toward normalization of fiscal policy. The measured comments from the Fed
helped extend recent gains for all three major stock indices.* In addition, many types of
bond prices were relatively steady, which meant that they had already “priced in” this
interest rate increase.**
Background
As reflected in positive moves in both the stock market and relative steadiness of the quality
bond market, the decision to raise short-term interest rates is not necessarily bad news for
investors, Raymond James Chief Economist Scott Brown explains. It reflects an improved
economic outlook. The latest employment report, for example, showed an uptick in construction
and manufacturing jobs, a sign of strengthening business investment. Even with the rate increase,
monetary policy remains accommodative. Consumer and business borrowing costs may rise
moderately, but the economy is expected to strengthen further over the course of 2017.
The Fed may be on a collision course with policies coming out of Washington, notes Brown.
Reduced regulation, a possible infrastructure spending package, and tax cuts should provide
some lift for economic growth. In contrast, the Fed sees an economy near full employment.
Labor market constraints would keep overall growth at a moderate pace. Of course, as Yellen has
noted, the timing, size and character of Washington’s policy changes remain uncertain.
The rate increase was only the third since 2006. Any immediate effects will likely be modest, as
they were in December. Banks tend to raise interest rates on loans before raising rates on
deposits, so borrowers should see a change first, while savers may have to wait a little longer to
see their interest rates rise.
Many bond investors have been concerned about interest rate increases because bond prices do
have an inverse relationship with rate increases. However, as we can see from this rate increase,
the reality for bonds is much more nuanced and interest rates don’t move in lockstep with Fed
policy.
We will, of course, continue to monitor the latest market and economic news on your behalf.
Should anything change, we’ll be sure to share the most relevant updates with you along with
implementation of strategies as appropriate. Please know that we were expecting the Fed’s
action of yesterday and had already incorporated that into our advice to you.
As always, please let us know any questions or comments.
Our best,
Laura
LAUREL WEALTH PLANNING
3300 Edinborough Way, Suite 790, Edina, MN 55435 | 952-854-6250 | fax 952-854-6276
www.laurelwealthplanning.com
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*Dow Jones Industrial Average: The Dow Jones Industrial Average is a composite of 30 stocks spread
among a wide variety of industries, such as financial services, industrials, consumer services, technology,
health care, oil & gas, consumer goods, telecommunications, and basic materials. The index represents
approximately 23.8% of the U.S. market, and is price weighted (component weightings are affected by
changes in the stocks’ prices).
*S&P 500: Representing approximately 80% of the investable U.S. equity market, the S&P 500 measures
changes in stock market conditions based on the average performance of 500 widely held common stocks.
It is a market-weighted index calculated on a total return basis with dividend reinvested.
*NASDAQ Composite: Including over 3,000 companies, the NASDAQ Composite is an index measuring
all NASDAQ domestic and international based common equities listed on The NASDAQ Stock Market.
Most companies represented are technology and Internet-related, but there are financial, consumer, bio-tech
and industrial companies as well.
**As measured by the Vanguard Total Bond Market ETF (BND), as of 12:00 p.m. CST, March 16,
2017.
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Past performance is not an indication of future results.
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