Fed Hikes Interest Rates But Doesn't Signal Faster Tightening Pace

The Federal Reserve hiked its key interest rate by a quarter point on Wednesday, signaling that two more rate hikes are likely this year, just as financial markets were expecting.

After a hawkish shift that had taken markets by surprise a few weeks back, it seems that the Fed and investors are on the same page, at least for now.

With the Fed still projecting three rate hikes in 2018, Fed chief Janet Yellen said in her post-meeting press conference that policymakers' projections of future interest-rate policy were "essentially unchanged" since December.

That signals the Fed isn't worried about being behind the curve, even as Yellen expressed her "confidence in the path the economy's on," noting a somewhat firmer pace of business investment and acceleration in jobs gains to an average of about 200,000 per month added over the past three months.


After the Fed's announcement, broad market indexes added to gains on the stock market today, and kept rising following Yellen's comments. The Dow industrials rose 0.5%, the S&P 500 index 0.8% and the Nasdaq composite 0.7%. The big-cap Nasdaq 100 hit an all-time high, with Apple (AAPL), Facebook (FB) and Google parent Alphabet (GOOGL) all reaching record levels intraday.

The 10-year Treasury yield fell nine basis points to 2.50%, after running up to its best levels in more than two years as markets priced in a March rate hike.

Higher rates are generally a positive for financials like Bank of America (BAC) and Dow Jones industrial average components Goldman Sachs (GS) and JPMorgan Chase (JPM), which can reap higher net interest margins from a steeper yield curve. But with the Fed sticking to its rate hike schedule, Bank of America and Goldman Sachs turned slightly negative while JPMorgan Chase clung to a 0.2% gain.

Faster monetary policy tightening could put further upward pressure on mortgage rates and might be a negative for shares of homebuilders like Toll Brothers (TOL), Lennar (LEN) and D.R. Horton (DHI). Still, even amid rising rates in recent weeks, the homebuilder group has been on fire, with Toll and Lennar among a raft of stocks breaking out of bases amid strong earnings and expectations for what is expected to be a strong spring selling season.

The National Association of Home Builders said Wednesday that its Housing Market Index for March jumped to its best level in nearly 12 years.

Toll, Lennar and D.R. Horton rallied about 1% after the Fed signaled just two more hikes in 2017.

A proactive Fed also could continue to drag down gold miners like Newmont Mining (NEM) and Barrick Gold (ABX). The price of gold has slumped close to 5% since late February as the market priced in a faster pace of rate hikes and the dollar has strengthened. But gold prices firmed after the Fed release while the dollar retreated.

IBD'S TAKE: Just three weeks ago, odds of a rate hike at the March meeting looked slim. Yet Fed policymakers have recently signaled impatience to keep raising interest rates, even as the prospects for a near-term economic stimulus from President Trump are diminishing.

Markets had been anticipating a rate hike since a series of hawkish Fed policymaker comments on Feb. 28 turned expectations for the March meeting upside down. Fed Chair Janet Yellen, widely seen as among the more dovish members of the rate-setting committee, sealed expectations with her March 3 speech saying a rate hike this month would likely be appropriate. She also endorsed Fed members' December projection of three rate hikes in 2017 as likely to be appropriate.

President Trump still has three Fed governor openings to fill, so it's very possible that the makeup of the committee will get more hawkish as the year progresses. Still, economic data will be the biggest factor. Yellen noted in her recent speech, which came before March's 235,000 job gain, that recent job growth of around 180,000 per month is "notably above the level estimated to be consistent with the longer-run trend in labor force growth — between 75,000 and 125,000 per month."

In December, Yellen was widely believed to be among the doves projecting just two rates hikes in 2017. With Yellen having moved to the center, the big question going into the meeting was whether the center itself would move in a more hawkish direction. That could happen if the job market stays as hot as it has been the past couple of months, but the new Fed projections should give markets some comfort. Here's why: Back in December, there were 5 Fed committee members expecting four or more rate hikes in 2017. The new statement shows that there are still only five hawks, while nine members projected a total of three hikes in 2017 and three members saw even slower tightening.

Yellen noted that expectations for future rate hikes were based on incoming economic information, rather than seen as a preemptive way to combat inflation that might percolate if Trump and Congress pass an economic stimulus program. She added that the rate-setting committee will have plenty of time to respond once the fiscal policy outlook becomes clear.

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