Fed hikes short-term rates for third time in 15 months
Fed’s constructive growth and inflation outlook likely paves the way for further hikes
The US Federal Reserve (the Fed) hiked its benchmark short-term interest rate by 25 basis points today, as expected. The statement was generally neutral, in our view, with upbeat commentary around the current growth backdrop. Inflation commentary was more mixed, stating that headline inflation has moved closer to the Fed’s target, yet emphasizing that core inflation continues to run below the Fed‘s target. Overall, the statement was similar to the January‒February statement, meaning that little has changed to alter the Fed’s view since then.
The Fed also released its widely anticipated Summary of Economic Projections (SEP), which includes the forecast of the federal funds rate or the so-called “dots.” The projected year-end 2017 federal funds rate indicates three rate hikes, unchanged from December’s SEP release, while the bond market had only been pricing in two prior to today’s announcement.1 The longer-run federal funds rate was unchanged at 3.0%. Growth and inflation projections were largely unchanged with only a slight upward revision to 2017 core inflation, from 1.8% to 1.9%.2
In her press conference, Fed Chair Janet Yellen stated that an unchanged SEP is consistent with gradual rate increases over time. The Fed is discussing and monitoring fiscal policy changes but has not yet included potential impacts in its projections. Therefore, federal funds rate projections were left unchanged.
Given our constructive outlook for global growth, our base case view has been that the Fed will likely hike rates three times in 2017. We expect the bond market to continue to converge toward this view. We believe that risk assets will continue to be supported by a better global growth picture. If the market abruptly begins to price in more than three Fed hikes (four or more) or it believes that the Fed is behind the curve (meaning that it believes the pace of rate hikes is too slow), we would look to scale back this view, as this concern could lead to a risk-off environment.
1 Source: Bloomberg L.P., March 15, 2017
2 Source: federalreserve.gov, March 15, 2017
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Noelle Corum, CFA
Invesco Fixed Income
Noelle Corum joined Invesco Fixed Income in August of 2010 and is involved in derivatives, FX
and rates trading, macro view implementation and asset allocation.
Ms. Corum began her investment professional career at Invesco following her undergraduate
She earned a BS degree in business administration, with a concentration in financial analysis,
from Saint Louis University, where she minored in mathematics and earned a certificate in
James Ong, CFA
Senior Macro Strategist
Derivative Portfolio Manager
James Ong is a Senior Macro Strategist and a Derivative Portfolio Manager for Invesco Fixed Income (IFI). Mr. Ong contributes economic and market analysis to the Macro Research platform. Mr. Ong leads IFI derivative strategy and oversees derivatives held in IFI portfolios.
Mr. Ong began his investment career in 2001. Prior to joining Invesco in 2014, he was a senior vice president, a senior portfolio manager and a senior trader at Hartford Investment Management Company.
Mr. Ong earned his BA degree in economics from Middlebury College. He is a CFA charterholder.