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March Rate Hike

Analysis by Ryan Lange, CFA, CAIA Senior Investment Strategist

March 21, 2018

By: Ryan Lange

The Federal Reserve board announced an increase of the federal funds rate of 0.25% this March. This is the first increase since mid-December 2017 and moves the rate to a target range of 1.50% to 1.75%. Also of note, this was the first Federal Reserve board meeting with the new chairman as Jerome Powell took over for Janet Yellen last month.

While the interest rate increase today was expected, the financial markets are paying close attention to the comments from Powell to position for upcoming rate hikes this year and beyond. The statement today shows that the average expectation from the board members is for a total of three interest rate increases in 2018 and four increases in 2019. As of this afternoon, the fixed income markets are positioned for 3 to 4 rate hikes this year.

Keep in mind that the Federal Reserve can only directly control short-term interest rates. Longer-term rates are controlled by many factors including future inflation expectations, supply/demand of bonds, international interest rates and the overall risk sentiment in financial markets. The 10-year US Treasury rate has moved sharply higher since early September, going from 2.02% to current levels around 2.90%. A key factor in this move is higher inflation expectations coming from the recent tax reform bill in December and a large federal spending bill that passed in January. This fiscal stimulus will add hundreds of billions of dollars to the economy over the upcoming years.

The Federal Reserve board continues to be data dependent and will adapt the current plan as they monitor economic data. The next meeting will be May 1 to May 2, 2018 with current expectations that they will leave the federal funds rate at current levels. Expectations are for the next rate hike to come from the June meeting.

Ryan Lange, CFA, CAIA
Senior Investment Strategist
Great Western Bank Wealth Management

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