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Good Economic News Pushes Fed to Make First Rate Hike of 2018

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The U.S. Federal Reserve announced Wednesday its first interest rate hike of 2018, shifting up 0.25%, increasing the target rate to 1.50% – 1.75%.

The announcement capped Jerome Powell’s first meeting as Chairman of the Federal Reserve and expressed growing confidence in the strength of the U.S. economy. 

With the probability of a rate increase at over 90% before the announcement, the hike didn’t surprise investors. The Fed also provided direction on future rate moves over the next three years, with two more 0.25% increases planned for 2018, three more 0.25% increases for 2019 and another two 0.25% increases for 2020.

If the Fed sticks to its forecast, the target rate will sit at 3.25% – 3.50% in 2020.

To date, the Fed has been steady in its approach to raising rates as it attempts to normalize them from the post financial crisis lows.  However, even looking ahead to 2020, rates will still be low relative to historical averages.

Good news for the U.S. economy

A key part of the Fed announcement was its outlook for economic growth in the U.S. which is expected to be slightly higher than previously forecasted. Unemployment is also set to tick down more quickly than expected earlier.

Inflation was the main focus for the Fed which made little change to its forecast. It expects medium term inflation to be modest while reaching its target of 2.00% over the next two years.

Markets expected a more hawkish outlook

The Fed announcement triggered a slight selloff in the S&P 500 while the U.S. dollar sold off relative to developed nation currencies like the Euro, Yen and Canadian dollar as investors digested the dovish tone of the report.

No changes to your portfolio for now

This week’s announcement confirms our view that further economic expansion in the U.S. is on the horizon. That will support equity prices not just south of the border but also around the world.

As a result, we haven’t made changes to clients’ portfolios. The Fed’s forecast continues to align with our expectations of an economic environment where equities are more attractive relative to fixed income. Our portfolios are already positioned to participate in further upside potential from equities with a focus on downside protection were the markets to become more volatile and uncertain.

U.S. Federal Reserve Boosts Rate, Signals Confidence in Economy 

The U.S. Federal Reserve today announced its first interest rate hike of 2018, shifting the target range up 0.25% to 1.50% – 1.75%. The announcement followed Jerome Powell’s first policy meeting as Fed Chair and shows renewed confidence in growth prospects for the U.S. economy.

In its statement, the Fed focused on key themes driving its decision-making, including: 

  • Strong job gains in recent months combined with low unemployment
  • A moderation in household and fixed investment spending
  • Inflation expectations in line with the Fed’s 2% target

The interest rate boost comes as part of a slow and steady return to historically normal levels, up from the low rates that followed the 2008 financial crisis.

Future hikes on the way

The Fed has also expressed its view that economic activity will continue to grow and raised its real GDP projections for 2018 and 2019. In light of their views for more robust economic activity in 2018 and 2019, the Fed plans to raise rates two more times in 2018, three more times in 2019 and another two times in 2020.

We’ll have more to say about the Fed decision and what it means for your portfolio soon. In the meantime, you can read the full statement here.

About the Author

Edward Golding, CFA, MBA, was an Assistant Vice President with the Multi-Asset Management team at MD Financial Management. He oversees the Canadian, Dividend and U.S. equity mutual funds and investment pools at the firm.

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