Fed Moves Markets With First Rate Hike Of 2017: On Path To 'Beautiful Normalization'
The Federal Reserve delivered the interest rate hike the markets were expecting on Wednesday.
The Fed announced it will be upping the fed funds target rate by 0.25 percent to a range of 0.75-1.0 percent.
Despite the fact that rising interest rates are typically bad for stocks and commodities like gold, both the SPDR S&P 500 ETF Trust (NYSE: SPY) and the SPDR Gold Trust (ETF) (NYSE: GLD) initially jumped following the announcement.
The iShares Barclays 20+ Yr Treas.Bond (ETF) (NYSE: TLT) also gained ground following the announcement, while the iPath S&P 500 VIX Short Term Futures TM ETN (NYSE: VXX) continued its Wednesday decline.
In its statement, the Fed said business fixed investment “appears to have firmed somewhat.”
“Inflation has increased in recent quarters, moving close to the Committee’s 2 percent longer-run objective,” the Fed adds.
Economists certainly weren't surprised by the decision.
“The summary of economic projections indicated a more confident Fed that indicated a modestly quicker pace of tightening in 2018 & 2019,” RSM chief economist Joe Brusuelas tells Benzinga.
“Given the slightly hawkish tilt of the interest rate forecast, Chair Yellen is certain to reinforce a gradual pace for policy normalization to temper the hawkish tilt in the rate forecast.”
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Allianz chief economic advisor Mohamed El-Erian tells Benzinga the Fed may soon feel a bit more flexibility when making its policy decisions.
“As it gets more comfortable with the economic outlook, the Fed appears to be getting more confident in leading markets on what it hopes will be a path of ‘beautiful normalization’ of policy rates,” El-Erian says.
“In doing so, it will be gradually moving away from the strict ‘data dependency’ that has governed its policy approach since the global financial crisis.”
The positive reaction in both stocks and gold can be attributed to two factors.
First, the Federal Reserve wasn’t as aggressive with the March hike as many investors had feared. Second, the bullish market reaction may be somewhat of a relief rally after stocks and gold have both slumped in recent weeks.
TDAmeritrade's JJ KInahan said, "for the bonds, the reason I think yields were down because the news was so expected. It was already priced in. people wondering what's next."
Regarding future hikes, Kinahan said, "Their predictability has not been great the last couple of years, so we'll leave it at that. There's so much policy noise to come out over the next few months. That's going to have a bigger effect than the Fed."
Prior to today’s session, the SPY was down 1.2 percent so far in March, while the GLD had dropped 4.1 percent.
The market now expects the Fed to deliver two more rate hikes in 2017. According to CME Group, the fed fund futures market is pricing in a target rate of 1.25-1.50 percent by the Fed’s December meeting.
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