An increasingly transparent Federal Reserve, which has widely telegraphed its intention to raise interest rates before the end of the year did just that minutes ago when the FOMC lifted the federal funds rate target from 0.50% to 0.75%. That was the first such move in a year. The action and the magnitude of the increase both had been expected. The stock market, not surprised by the outcome of the meeting, has responded with a shrug, with prices edging up modestly in the minutes following the bank's release, before subsequently giving back those gains in a modest retreat.
According to the Fed, the labor market has continued to strengthen and economic activity has been expanding at a moderate pace since midyear. It went on to affirm that job gains have been solid and the unemployment rate, now 4.6%, has continued to head lower. Also, inflation, long below the Fed's 2% target, is still expected to rise to that more acceptable level over the medium term. The bank also maintained that near-term risks were roughly balanced with respect to the economic outlook.
So, the Fed opted to act, to the relief of most stock and bond market participants. However, yields on the 10-year Treasury note--already up in recent weeks--headed still higher after the announcement, rising very quickly to 2.51%. It had been as low as 2.42% this morning following the release of the lackluster retail sales gain.
Now, the big unknown is just where does the Fed go from here. Our sense is that the bank will not go another year between interest rate increases, but rather will raise borrowing costs some three times--or more--in 2017 and then follow that up with an encore in 2018. The market, which did not show all that much disappointment with this small adjustment, might be less forgiving if the central bank adheres to such an aggressive course going forward. – Harvey Katz
