Federal Reserve Lays Groundwork For More Rate Hikes In 2017

As was widely expected, the Federal Reserve raised the Fed Funds rate by a quarter of a percentage point last week, up to a range of 0.5% to 0.75%. This was a unanimous decision, as the growing chorus of dissenters from previous meetings finally got the interest rate hike they were looking for. In her post-meeting press conference, Janet Yellen acknowledged that this interest rate hike reflects the resiliency of and the Fed’s confidence in the economy.

After single quarter-points hikes in both 2015 and 2016, the Federal Reserve now expects to raises rates three times (by a total of three-quarters of a point) in 2017. Will this have an effect on equities and the S&P 500 (INDEXSP:.INX) into 2017?


For the first time in several years, the Fed’s projected path of interest rates has actually shifted slightly higher. This upward revision did come as something of a surprise and could be a welcome early indicator of upward revisions to growth more generally. It also served as a catalyst for an uptick in volatility (INDEXCBOE:VIX) in the financial markets. Some consolidation would be welcome after extended moves to the upside by both stocks and bond yields over the past month and a half, especially if it helps cool surging investor optimism. Given strong seasonal tailwinds and improving breadth any near-term weakness that does emerge is likely to be limited in degree and duration.

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Looking forward, the path of interest rates is now moving higher and noise associated with specific Fed actions could begin to recede. That would be a good thing, as the market could more rightly focus on the news of emerging economic tailwinds, improving corporate fundamentals and potential policy reforms that could help spur a return of productivity growth (topics which we discuss in our 2017 Outlook: Focus on Fundamentals).



Happy holidays to you and yours! Thanks for reading.


Twitter:  @WillieDelwiche

Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.