Fed hikes rates, more likely in 2017

Federal Reserve announces another rate increase

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The U.S. Federal Reserve's (Fed) policy-making committee increased the benchmark federal funds interest rate to 1.00%, a 0.25-percentage-point increase. This follows an increase in December 2016.

The Waddell & Reed investment team says the increase was widely expected, based in part on Fed Chairperson Janet Yellen’s comments to Congress in February. Yellen said that quicker rate increases could be appropriate if the economy stays on track and certain benchmarks are met. “Waiting too long to remove accommodation would be unwise” and could force the FOMC to rapidly rise rates, Yellen said.

In announcing the increase, Yellen stated, “Our decision to make another gradual reduction in the amount of policy accommodation reflects the economy’s continued progress. Today’s decision is in line with that view, and does not represent a reassessment.”

Our investment team thinks more interest rate hikes are likely this year, and believes the Fed leadership will have a more “hawkish” approach, potentially leading to somewhat higher interest rates in the future.

Overall, we believe this is the next step in continuing to grow the economy strategically.

“While we are still reviewing the possible implications of the new administration’s fiscal policies, the recent economic data suggests that the economy continues to gain momentum,” said Mark Beischel, the Waddell & Reed investment team’s Global Director of Fixed Income. “Having met the employment goal and with inflationary pressures building the market’s expectation is for two more rate hikes this year, with a gradual pace of tightening throughout 2018. The orderly process of scaling back accommodation should continue to be supportive of credit spreads.”

Learn more about Waddell & Reed’s views on this year in our 2017 Outlook: Change on the horizon.

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The opinions expressed are those of Waddell & Reed Investment Management Company and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through March 2017, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon..

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