The U.S. Federal Reserve (Fed) hiked its key interest rate by 0.25% today, to a range of 0.75%–1.00%, marking the third increase in the current cycle. Fixed income markets had essentially priced in the increase two weeks ago, when nearly every Fed speaker acknowledged that a March hike appeared to be warranted. The vote was not unanimous as Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, voted against the action, preferring to keep the target rate unchanged at this meeting.
The meeting statement indicated that the Fed views the labour market and economic activity as having continued to improve moderately. The committee believes the risks to the economic outlook continued to be roughly balanced and signaled they will continue to monitor inflation and global economic and financial developments.
The Fed summary of economic projections saw only slight changes from January, while the projections of the Federal Funds Rate were unchanged. The market appeared to be surprised by the lack of change in the Fed Funds rate expectations, as the recent stream of generally hawkish speeches from the Fed prior to today’s meeting suggested a more hawkish tilt.
At the press conference, Fed Chair Janet Yellen suggested that the Fed expectations to hike another two times in 2017 remained the base case and she refused to give any specifics on when any adjustment to the size of the Fed’s balance sheet would begin.
The next Fed meeting is scheduled for May 3, 2017. While the Fed has now embarked on a gradual rate hiking cycle, I would not expect another rate hike until late in the second quarter, or early in the third.
Given our positive view on global growth, we believe today’s statement is positive for both bond and equity prices as well as other risky assets, but negative for the U.S. dollar.