Interest Rate Hike Signals Fed Confidence

As expected, the FOMC raised interest rates overnight by 0.25%, to a target rate of 1.50-1.75%.  More interestingly for investors, the Fed shows increased optimism about current growth prospects through 2019, with an expectation of 2.5% GDP growth this year, and 2.4% next year.  This would be accompanied by a commensurate drop in unemployment rates, to 3.8% in 2018 and 3.6% the following two years.  Additionally, more Committee participants are now expecting the need for four interest rate hikes this year, although the median still stands at three.  The general consensus is that the current business cycle is not yet over, and interest rates are likely to be around 3.4% by the end of 2020.  The market is currently pricing the possibility of another rate hike at the FOMC's June meeting to be around 80%.

One possible caveat is the threat of tariffs hampering economic growth and recovery.  Fed Chair Jerome Powell noted that the FOMC has not incorporated tariffs into its projected outlook, but the Committee is monitoring the possibility closely due to concern from the business community.

In response to the rate hike, the US dollar fell, while markets were generally turbulent today due to the threat of an impending trade war with China.  The Bank of England chose to leave rates steady at its own meeting, but is strongly considering a rate hike at its next meeting in May.  The People's Bank of China also raised interest rates on 7-day reverse purchase agreements, but only by a modest 0.05%, to 2.55%.  The Chinese move was likely intended mostly as a symbolic move to indicate that they are keeping a close eye on international markets, and aim to keep the rate spread between China and the United States to a minimum.