Federal Reserve Announcement: First Rate Hike in 9.5 Years

December 17, 2015

In an expected and unanimous decision, the U.S. Federal Reserve (Fed) announced on December 16 that it was raising its Fed funds rate to 0.25%-0.50% from 0%-0.25%, where it had been since December 2008. The last time the U.S. central bank raised the Fed funds rate was June 2006.

Why did the Fed raise rates?

The Fed noted a considerable improvement in labour market conditions and is confident that inflation will rise over the medium term to its target of 2%.

What about future rate increases?

The Fed will continue to watch the economy carefully and made it clear that future increases will be slow and measured. Federal Reserve officials believe the interest rate will rise in the coming years with the median expectations being:

Dec. 2015 Sept. 2015
End of 2016 1.3% 1.6%
End of 2017 2.4% 2.8%

What are the Fed’s projections for economic variables?

Between now and 2018, the Fed expects the following, compared to their projection at the September 2015 meeting.

Dec. 2015 Sept. 2015
Real GDP 2016 2.4% 2.3%
Unemployment rate 4.7% 4.8%
Core inflation 1.6% 1.7%

How does the decision impact MD portfolios?

We do not expect the Fed’s rate hike to have a material impact on the overall positioning or performance of our funds and pools. However, MD will continue to monitor the markets and will make appropriate adjustments.

By using MD’s portfolio architecture, Global Portfolio Strategy (GPS), we ensure that risks are calibrated to a client’s specific tolerances and the diversification provided by the numerous asset classes embedded within GPS portfolios helps mitigate short-term volatility.

Despite the small increase in the Fed funds rate, we believe that central banks around the world will continue to be accommodative in their monetary policies and this should be supportive of most financial assets.

MD actively manages our portfolios, funds and pools by monitoring global economic trends and integrating viewpoints from carefully selected managers. We encourage you to speak with your MD Advisor if you have any questions. Your MD Advisor can work with you to ensure your portfolio is diversified and well positioned to withstand market volatility.

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