Have you seen interest rates lately?
The Federal Open Market Committee (FOMC) met on March 21st and concluded by raising rates .25 percent as anticipated to target a range of 1.5 to 1.75 percent. The decision to lift rates was a unanimous 8-0 vote. Minutes from their meeting showed officials indicating a stronger economic and inflation outlook, and according to them, “the appropriate path for the federal funds rate over the next few years would likely be slightly steeper than they had previously expected.” The real debate now is whether we get a total of 3 increases this year or maybe 4? And can the economy handle further increases in 2019 and beyond?
For the moment, the FOMC’s agenda for 3 hikes in 2018 seems mostly intact (and even market consensus now fully believes their schedule). However, accounts of the most recent meeting did show policy makers turning slightly more hawkish. December saw 75 percent of the committee expecting less than 4 raises this year, while in March that figure ticked lower to just north of 50 percent – upping the headcount for those in favor of additional adjustments higher. And with the U.S. Gross Domestic Product (GDP) continuing to expand, the case for more hikes seems well supported.
The American economy advanced at a faster pace in the fourth quarter of 2017 than previously estimated. GDP was revised up to 2.9 percent from 2.5 percent year-over-year. Consumer spending, the highest contributor to the economy, grew 4% versus 3.8%. Per Bloomberg’s economists, “the gain in fourth- quarter profits from a year earlier, together with lower corporate taxes following the tax overhaul signed by President Donald Trump late last year, bodes well for business investment and employment.” Additionally, “household purchases, which account for about 70 percent of the economy, also are likely to be supported in the coming months by bigger after-tax paychecks and the robust labor market.” In fact, the Fed updated their growth forecasts higher. They now project the economy to expand to 2.7 percent in 2018 versus the 2.5 percent expected back in December, and see 2.4 percent versus 2.1 percent for 2019.
The growth momentum has also pushed the Fed to adjust the future path of rates. U.S. central bankers are now guiding median rates to 2.9 percent for 2019, which implies three raises vs the two suggested in December. And rates are estimated to reach 3.4 percent for 2020 vs the 3.1 previously forecasted.
Although virtually all yields are up today versus last year, the ascent has been different across the curve, a telling sign of current conditions. Rates on short-term Treasury bills have been steadily heading one direction higher, while longer duration Treasury bonds have proven a bit more back-and-forth. On the one hand, monetary policy, fiscal policy, and other macroeconomic factors such as wage growth and inflation are causing the entire curve to shift higher. On the other hand, stock market volatility, brought on by trade disputes, has seen risk-on/risk-off sentiment influence longer-term Treasury prices as safe haven flows quickly turn hot/cold pending daily news headlines.