United States

Federal Reserve raises rates


As expected, Federal Reserve officials raised the federal funds rate 0.25 percent in June to a range of 1.75 percent to 2.00 percent. The committee now forecasts a total of four rate hikes in 2018, up from three rate hikes at the March meeting. The committee upgraded forecasts for gross domestic product (GDP) growth, inflation trends and unemployment for 2018 citing stronger economic activity and tighter labor market trends. Fed policymakers revised their GDP forecast 0.1 percent higher to 2.8 percent, increased their inflation forecast 0.2 percent to 2.1 percent and now expect the unemployment rate to decline 0.2 percent to 3.6 percent by year-end.

Fed officials maintained their forecast for three fed fund rate hikes in 2019. Following the release of the June Federal Open Market Committee meeting, the federal funds futures market increased the probability of a fourth rate hike in 2018 from 24 percent to 36 percent. The gap between year-end policymaker forecasts and market-implied expectations suggests investors remain skeptical economic conditions warrant a fourth rate hike in 2018.

Key points

Federal Reserve policymakers upgraded their assessment of U.S. economic growth. Consequently, the committee now expects to raise the federal funds rate four times in 2018. The full impact of fiscal policy and monetary policy changes will take time to flow through economic channels. Furthermore, interaction effects of these policies could make the path of monetary policy normalization less discernable in the second half of 2018. Absent adverse economic impacts from foreign trade policies and monetary policy normalization, improving labor market and inflation trends are supportive of three total rate increases this year.

U.S. equities fell about 0.4 percent on concerns of higher inflation expectations but were mostly unchanged on the day. The committee's upgraded forecast indicates they are raising rates for the right reasons – namely tightening labor market conditions and accelerated economic growth. Continued global monetary policy remains largely accommodative and supportive of equity valuations. While we continue to assess potential impacts of future Fed policy decisions on equity markets, we believe the dominant theme driving equities in 2018 is continued synchronized global growth which gained momentum in the second half of 2017.

The treasury curve was relatively unchanged as the 2-year/10-year spread held steady at about 0.4 percent. The yield curve remains relatively flat and consistent with levels traditionally associated with tighter monetary conditions. Looking ahead, policymakers will continue to monitor potential impacts from expected treasury supply issuance and wind down the Federal Reserve’s balance sheet – an event which has no precedent. Astute investors will focus on how rising rates and balance sheet normalization influence credit spreads and long-term interest rates. Fed policymakers could take a “wait and see” approach should either experience a sustained increase. Importantly, these forces are not new but do present more variables for data-dependent Fed policymakers.

RSM US Wealth Management continues to believe that investors should be patient and adhere to a well-constructed, diversified investment portfolio anchored to your goals and time horizon. Despite elevated uncertainty, we do not find compelling reasons at this time that would justify overriding our asset allocation methodology.

Wealth Management Services Disclosure

Information in this document was prepared by DiMeo Schneider & Associates, L.L.C. and although information in this document has been obtained from sources believed to be reliable, RSM US Wealth Management LLC, DiMeo Schneider & Associates, L.L.C. and their respective affiliates do not guarantee its accuracy, completeness or reliability and are not responsible or liable for any direct, indirect or consequential losses from its use. Any such information may be incomplete or condensed and is subject to change without notice. The Frontier EngineerTM is a registered trademark of DiMeo Schneider & Associates, L.L.C.

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