Rising Interest Rates
Last week the Federal Reserve voted to raise their benchmark rate by 0.25%, moving from .5% to 0.75%. This was third rate hike in a little more than a year, and the second since December 2016. The last time the Fed raised rates at consecutive quarterly meetings was back in 2006, when they increased rates in March and then again in June. Although the odds of an increase in rates were low as this month began, rising inflation data and a strong jobs report allowed the Federal Reserve to communicate their desire to raise rates prior to their formal meeting. In her post-meeting press conference, Janet Yellen stressed the continuance of accommodative monetary policy to promote economic growth. This caused longer term bond yields to decline, as the market expected the Fed to shift towards tighter monetary policy. Still, they maintained their outlook of a gradual rise in the Fed Funds rate over the next several years, with a forecast of at least two more rate hikes this year and three next year.
The odds of a rate increase rose to near certainty after comments from Yellen and other Fed Bank Presidents along with a strong labor market report. Wages continue to trend higher, which supports consumption that drives our economy. However, increasing wages typically comes at the cost of higher inflation. Consequently, recent inflation data rose close to the Federal Reserve’s target of 2%, which is the highest level since 2012. Therefore, we continue to expect at least one more rate hike this year with the potential for more if economic conditions continue to improve. In fact, market expectations have converged with the Federal Reserve’s forecast of three increases this year, although odds of a June hike have dropped from 80% to 50% since last week’s vote.
Despite the uptick in short term rates, longer term rates recently declined as the 10-year Treasury rate fell 10 basis points over the past week to 2.43%. This may be transitory, as the market weighs the probability that President Trump’s pro-growth policies are delayed or altered due to gridlock in Washington. Still, recent economic data supports our belief that the economy is strengthening, which should result in higher short term and intermediate term interest rates as we move through 2017. In fact, we reviewed the last three major tightening schedules (‘94/95, ‘99/00, & ‘04/06), short term government bond yields (as measured by 6-month T-Bills through 2 Year Treasury Notes) rose an average of 1.5-2% while longer term rates (10-year & 30-year Treasury Bonds) rose an average of 0.4-0.6%. Although we have yet to see a meaningful uptick in short term yield instruments (i.e. CDs, Money Markets, savings accounts), we expect yields to rise over time as a higher rate environment results in greater profitability for banks. This will ultimately help retirees and savers, as short term yields move off the historically low levels we have experienced since the financial crisis.
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance is no guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Bouchey Financial Group, Ltd. [“Bouchey Financial”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, no portion of this discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Bouchey Financial. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Neither Bouchey Financial’s investment adviser registration status, nor any amount of prior experience or success, should be construed that a certain level of results or satisfaction will be achieved if Bouchey Financial is engaged, or continues to be engaged, to provide investment advisory services. Bouchey Financial is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Bouchey Financial’s current written disclosure Brochure and Form CRS discussing our advisory services and fees is available for review upon request or at www.bouchey.com. Please Note: Bouchey Financial does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Bouchey Financial’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please Remember: If you are a Bouchey Financial client, please contact Bouchey Financial, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.