Finally, Fed Hikes Rates: Our Reaction to the Second Increase Since 2006

What a difference an election makes

“It wasn’t much of a surprise that the Federal Reserve announced a 25 basis point rate increase today – its first hike in 12 months and the second hike since 2006. It seems that solid employment reports, gradual increases in inflation and the prospect of fiscal stimulus have made Federal Reserve Open Market Committee (FOMC) members more hawkish. Chair Janet Yellen’s assessment of the economy was mildly more upbeat and it appears that the FOMC now foresees a slightly faster pace of tightening than they’ve previously indicated. This flip in attitude breaks the trend of recent years, in which the FOMC backed away from tightening meeting after meeting.  What a difference an election makes.”

– Brian Horrigan, Chief Economist

Outlook for a more aggressive pace of future hikes not priced in

“Today’s Fed rate hike was fully priced into the market. However, the outlook for a more aggressive pace of future hikes, was not. This was apparent by the stronger selloff in short-term maturity Treasurys versus longer-term Treasurys this afternoon. I remain constructive on inflation and growth, but believe rate volatility will continue for much of next year. This outlook leads me to favor pro-growth, less rate sensitive sectors such as financials, insurance and defense companies. Most interestingly, equities have remained quite strong in the face of higher interest rates – it will be fascinating to see if this trend can continue into 2017. “

– Maura Murphy, Portfolio Manager

First “hawkish hike” in over a decade 

“At first glance, today’s rate hike and steady-as-she-goes policy statement might imply a benign monetary landscape for markets. Not so fast. Once again, the big bang comes from the Fed’s summary of economic projections, which includes their projected path for the Federal funds rate (depicted in the Fed’s so called “dot plot”). Today, for the first time, the 2017 projection – or dot – was marked higher by 25 basis points, which implies three hikes next year rather than the two implied in the prior forecast. While the market assumed some probability of an increase in this dot, there was a bit more movement upward in the underlying forecasts than the market anticipated. Further, and perhaps most surprising, after a one-way move lower through the years, the Fed’s estimate of the longer-run nominal interest rate was also marked higher. So, while today’s hike is the second hike of this cycle, it’s the first to be paired with an increase in the dots and therefore the first “hawkish hike” in over a decade. “

– Michael Gladchun,  Fixed Income Trader