Our take on the March 2017 interest rate hike
March 16, 2017 -
In what can be described as one of the most widely anticipated moves taken by the Fed, short term rates were increased by 25 basis points yesterday. This move was very well communicated in advance of Wednesday’s meeting.
While this move (only the 3rd time the Fed has raised rates in a decade) is important, the fact that the Fed Governors have not significantly changed their economic and financial projections is interesting. This deliberate pace may mean that the Fed took the opportunity to move now and will continue along its prescribed path of gradual increases, as opposed to a faster rate of increases. If this is the case, it is construed as a continued dovish stance, with no real sense of urgency to raise rates at a faster pace.
The bond market reaction was immediate and foreseen, with bonds being bid up across the curve resulting in slightly lower yields. The 10 year Treasury prices jumped ¾ of a point, taking the yield from 2.53% to 2.48%, with a similar move in the 30 year Treasury, from 3.17% to 3.10%, resulting in a slightly flatter yield curve.
Volatility still exists in the middle to long end of the yield curve. The 10 year Treasury yield dropped to 2.31% in late February, and then increased day after day in March, reaching 2.62% just a few days ago and settling lower today.
The Fed’s medium term outlook comments were mostly inconsequential, with a call for slightly faster growth next year and a gradual increase in core inflation this year. With regard to unemployment, the signal seems to be that the Fed is more confident that it can let the unemployment rate decline without impacting the inflation outlook.
Guidance for future rate hikes was ambiguous. Policy continues to be accommodative, and future rate hikes will be gradual, as has been previously communicated.
We still believe that there will be two more rate hikes in 2017, likely in June and in September or November.
We continue to target duration slightly shorter (90-95%) than the benchmark and maintain our overweight to the higher yielding credit sector.
This commentary is provided courtesy of our affiliate, Great Lakes Advisors. This manager commentary represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice. No mention of particular securities should be construed as a recommendation or considered an offer to sell or a solicitation to buy any securities.