Download June 16, 2017 | Mark Simenstad, Vice President

June 16, 2017 | Mark Simenstad, Vice President and Head of Fixed Income Funds
The Federal Reserve Board (Fed) voted
Wednesday to raise rates for the third time in the
past seven months, following an eight-year stretch
during which the Fed adjusted rates only once.
With unemployment at a 16-year low, corporate
earnings on the upswing, and consumer spending
edging up, the Fed agreed to raise the federal funds
target rate by 25 basis points (0.25%) to a new
range of 1.00% to 1.25%.
However, new inflation and retail sales figures
released Wednesday prior to the Fed’s announcement both showed surprising declines. Retail sales in May
were down 0.3% from the previous month, according to the U.S. Department of Commerce, and consumer
prices were down 0.1% in May, according to the U.S. Department of Labor Consumer Price Index report,
dragging the rate of inflation down from 2.2% to 1.9%.
This unexpectedly soft data stirred a rally in the bond market Wednesday morning, driving down market
interest rates on 10-year U.S. Treasuries by 10 basis points to 2.11%—the lowest yield since November
2016.
This was the second rate hike of 2017, following a 0.25% increase on March 15. The Fed also raised rates
by 0.25% in December 2016 and December 2015. Prior to that, there had not been a Fed move since the
Great Recession when rates were cut from 5.25% to 0.00% during a 16-month period that ended with the
final cut in December 2008. The rate stayed at (or near) 0.00% for seven years until the first rate hike in
December 2015.
The Fed has been more comfortable raising rates
recently because of several economic fundamentals.
U.S. employers have added new jobs for 80
consecutive months as the unemployment rate
tumbled to just 4.3% in May—the lowest rate since
2001.
Retail sales had been rising prior to
Wednesday’s U.S. Department of Labor Consumer
Price Index report, and corporate earnings in the first
quarter of 2017 were growing at the highest rate
since 2011, according to FactSet.
Gross domestic product (GDP) growth was slow through the first quarters—a 0.7% annualized growth rate—
but the consensus projection for real GDP growth for all of 2017 is 2.2%, according to the June 10 Blue Chip
Economic Indicators report.
According to the Fed statement from its meeting, Fed board members expect at least one more rate hike this
year. However, the bond market’s reaction to the new inflation and retail sales numbers suggests that bond
analysts are skeptical that there will be any further rate hikes in 2017.
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We believe there could be at least one more rate hike this year if the economy strengthens. Federal Reserve
Board Chair Janet Yellen had announced earlier in the year that the Fed hopes to increase rates gradually
over the next two to three years if the economy remains solid. “We think gradual increases in the fed funds
rate will be appropriate,” noted Yellen.
Of equal importance to the Fed’s rate hikes has been its recent policy change regarding monetary policy.
The Fed has been reducing its bond purchases in order to tighten monetary policy, although it’s unclear how
much further they will reduce bond purchases in the future—and how that policy change will affect the
economy and inflation.
The next Fed meeting is scheduled for July 25 to 26.
Media contact: Callie Briese, 612-844-7340; [email protected]
All information and representations herein are as of June 14, 2017, unless otherwise noted.
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views
expressed by other Thrivent Asset Management associates. Actual investment decisions made by Thrivent Asset Management will
not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of
any particular security, strategy or product.
Asset management services are provided by Thrivent Asset Management, LLC, a wholly owned subsidiary of Thrivent Financial, the
marketing name for Thrivent Financial for Lutherans.
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