The Fed finally increases rates. Why?

Written on December 29, 2015

The Federal Reserve unanimously voted to begin their tightening cycle this week for the first time in nine years. The drivers for the rate increase are a fairly strong employment market and an anticipated increase in inflation. The Fed is increasingly optimistic that the economy will continue to improve and is “reasonably confident that inflation will rise over the medium term to its two percent objective.” Following the rate announcement, equities fell 100+ points, immediately bouncing back with a 200+ point gain, while the yield on the US 10-year treasury is up +0.02 percent to 2.29 percent.

Janet Yellen stated there is no set path for rate increases, so we are not expecting a hike at each meeting next year. Also of note is that the Federal Reserve has a huge balance sheet of assets purchased during the Quantitative Easing. Before they stop the reinvestment of principal or begin selling assets off their balance sheet, they seem to want to be far down the path of Fed Funds rate hikes. This should keep the rates on the longer end of the yield curve from rising.

All in all, the markets responded positively to the rate increase. As always, if you have any questions, please do not hesitate to contact us.

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