The Federal Reserve followed through on its well-telegraphed intention to raise rates on Wednesday, hiking short-term rates by 0.25%, or 25 basis points. The new target for the fed funds rate is 0.75% to 1%.
The policy statement cited the strengthening labor market and improving economy as reasons for the hike. But it noted the pace of expansion is just “moderate.”
Members of the Federal Open Market Committee voted 9-1 in favor of the rate hike with Neel Kashkari of the Minneapolis Fed voting to leave rates unchanged. The summary of economic projections did not signal that they plan to increase rates more than two more times this year, as some Fed watchers expected.
The immediate market reaction indicates investors interpreted the statement as more dovish than expected. Stocks climbed and Treasury yields fell sharply with the five-year note, which is most sensitive to Fed prospects, immediately dropping 10 basis points to a yield of 2.02%, according to Tradeweb. The yield on the benchmark 10-year note fell 8 basis points to 2.52% shortly after the release. The dollar plunged.
However, Fed Chair Janet Yellen will hold a press conference shortly that could add more clarity.
Bryce Doty, senior portfolio manager at Sit Fixed Income Investments, believes the rally in Treasuries was a “knee-jerk” reaction to the dot plot remaining unchanged. He expects yield to resume their “upward march.”
The Fed’s “dot plot” still indicates three rate hikes this year and next, but inched up in 2019, when it projected the median fed funds rate could be 3%, instead of its 2.9% forecast last December.
Meet The New Dots, Similar To The Old Dots
Tags: Daniel Tarullo, deregulatory agenda, Fed Chair Janet Yellen, Federal Open Market Committee, Federal Reserve, Federal Reserve Hikes Interest Rates a Quarter Point, Federal Reserve Regulatory Point Man, Interest Rates, Janet Yellen, President Donald Trump, U.S., U.S. Federal Reserve