What You Need to Know About the Fed's Rate Hike

Well, the Fed went ahead and did it. For the third time in six months, the nation’s central bank hiked up key interest rates. Investors largely expected the move, because by raising rates the Fed is acknowledging that the economy is improving further.

As a result, it was a minor hike; the Fed raised the benchmark interest rate by 25 basis points to a range of 1.00% to 1.25%. Again, this was widely anticipated. The Fed wants to get back to “normalization,” and another 25-basis-point increase gets it closer to this goal. So the stock market remained largely unchanged after the announcement. The Fed also maintained its outlook for one more rate increase in 2017.

Personally, I think that the Fed’s hands are tied when its comes to further interest rate increases. The Fed cannot raise short-term rates much higher unless long-term Treasury yields start to increase again. Remember, last week the 10-year Treasury bond yield fell to 2.15%, the lowest since November 2016. As Treasury and corporate bond yields have fallen, the yield curve has flattened.

At the same time, there isn’t a lot of inflation. Personal Consumption Expenditures (PCE) index is running at a multi-year low, and energy prices are moderating. In fact, the Fed acknowledged that inflation will likely fall well short of its 2% target this year.

So while the U.S. economy is picking up steam, we’re still not at a point where the Fed will be compelled to significantly increase key rates. And the Fed isn’t actually driving interest rates, market rates are. I expect that the data dependent Fed will postpone further interest rate hikes until Treasury yields rebound and inflation reemerges.

So I wouldn’t worry too much the Fed right now. In either event, in this rising rate environment, I’ll keep you updated on the latest stock market and economic news through this daily blog.


Louis Navellier

Louis Navellier

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