March 26, 2018 – Fed Ups Rates by 25 Basis Points, Hints at 4th Increase this Year

MARCH 26, 2018 – FED UPS RATES BY 25 BASIS POINTS, HINTS AT 4TH INCREASE THIS YEAR

As expected, new Fed Chair Jerome Powell announced a 25 basis point rate increase last week.   The vote to increase the federal funds rate was unanimous;  the range of rates now stands at 1.50 to 1.75 percent.  The language used in the FOMC meeting emphasized “further gradual adjustments” and remained set on three hikes by year-end, but did not completely rule out the possibility of a fourth hike in 2018.

It is more likely the Fed will choose to do more tightening in the future, rather than up the pace this year in order to avoid putting a damper on the economy and to avert a flattening of the yield curve.  The Fed is optimistic, seeing stronger economic growth and lower employment over the forecast horizon.  Their expectations for GDP growth were improved to 2.7% from 2.5% for 2018 and to 2.4% from 2.1% for 2019.  Unemployment forecasts were lowered from 3.9% to 3.8% for this year, and to 3.6% from 3.9% for 2019.

If you believe in the Fed’s outlook and a further rises in interest rates for this year and next, now would be a good time to assess your hedging programs. We remain advocates of hedging interest rates through the use of swaps at this time.

 

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