No Brackets Busted by the Fed

by Timothy D. Carkin
Senior Vice President

No Pot of Gold

As traders were nursing their wounds from early bracket pains, the market saw that U.S. stocks were muted this week, up 0.2 percent. Investors’ reactions to finally getting the anticipated Fed rate hike were tempered by oil production figures from OPEC, causing concern early in the week. Global stock markets rejoiced and posted their best week this year after the Fed came in less hawkish than some feared. Non-U.S. stocks rallied more than two percent with emerging markets leading the way up over 4.3 percent. 

Nothing to Fear from the Ides of March

In a widely anticipated move, the Federal Open Market Committee voted Wednesday to increase its benchmark rate one-quarter-percent for the second time in the last three months. The rate now stands at  0.75-1.0 percent. More importantly, the Fed confirmed what many members have hinted at over the past few weeks; that is, the Fed is on track for three rate hikes in 2017. There had been some talk that recent economic news might have some Fed members thinking of a fourth hike this year, but that seems premature.  

At the post-announcement press conference, Chairwoman Yellen noted that their action did not depend on a particular view of future fiscal policy, but rather was an adjustment based on how the economy looks currently. If monetary policy doesn’t change, inflation will stabilize around 2 percent over the medium term. The one dissenting vote on the committee was Minneapolis Fed’s Neel Kashkari, who thought that we should pause with the strengthening job market and wait to meet the inflation target before tightening further.

This week’s economic news supports Chairwoman Yellen’s “not too hot, not too cold” view. Of note:

  • The Producer Price Index (PPI) surprised with a reading of 0.3 percent
  • Core Consumer Price Index (CPI) reading for February rose just 0.1 percent meeting market expectations
  • Jobless claims fell by only 2,000 to 241,000
  • Housing starts moderately beat estimates while building permits missed moderately
  • Industrial production was a bit softer than expected in February, driven by a weather-related decline in utilities output
  • Manufacturing output surged 0.5 percent, the sixth consecutive monthly increase
  • The Dutch elections went to a centrist candidate, Prime Minister Rutte, pausing the rise of global populism

All in all, Chairwoman Yellen’s tone at her press conference gave confidence to the market as evidenced by the rally in the stock market and the flow of funds from bonds to equities. For the third year in a row economists forecast multiple rate hikes. Yellen’s confidence has many economists believing they could finally be correct. The FOMC meeting pretty much gave them the ammunition they need – namely, a rate hike, improvement toward the Fed’s objectives, a three-hike dot-plot and confirmation of a gradual path of normalization in the Fed Funds Rate.

Our Takeaways from the Week

  • Yellen instilled confidence in two more rate hikes this year, unless economic data changes
  • The economic landscape continues to show stability
  • The Ducks will do well in the Big Dance