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What You Need to Know About the Fed's Rate Hike

March 15, 2017

Well, the Fed went ahead and did it. For the second time in three months, the nation's central bank hiked up key interest rates. Investors largely expected the move, because by raising rates the Fed is acknowledging that the economy is improving further.

As a result, it was a minor hike; the Fed raised the benchmark interest rate by 25 basis points to a range of 0.75% to 1.00%. Again, this was widely anticipated, as the Fed is simply lining key rates up with market rates. So the stock market rallied after the announcement; as I write this, the Dow is up about 90 points for the day.

The Fed also maintained its outlook for two more rate increases in 2017. Personally, I don't think it's likely that the Fed will stick to this. However, it all depends on where market interest rates go. In recent weeks, 10-year Treasury bond yields have risen steadily on wave-after-wave of positive economic news. These higher yields also caused shorter-term Treasury bond yields to rise. If these rates continue to rise, the Fed may raise rates a few more times this year.

At the same time, there isn't a lot of inflation. Much of this is due to the recent collapse in crude oil prices. Earlier this week, the Labor Department announced that consumer prices rose just 0.1% in February. Even excluding food and energy prices, the core consumer price index climbed 0.2%. As it stands, core consumer prices have risen 2.2% over the past 12 months. Meanwhile, the Fed's own measure of inflation is still running below its 2% target.

So while the U.S. economy is picking up steam, we're still not at a point where the Fed will be compelled to significantly increase key rates. And the Fed isn't actually driving interest rates, market rates are. So I wouldn't worry too much the Fed right now. In either event, in this rising rate environment, I'll keep you updated on the latest stock market and economic news through this daily blog.

Sincerely,

Louis Navellier

Louis Navellier

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