The Fed Hiked A Quarter Percent: Now What?

So here we have it – the first rate hike in nearly a decade.

The Fed hiked rates a quarter point on the federal funds rate in a unanimous vote. This is the overnight rate member banks get when they need to borrow to meet reserve requirements. Dropping that little pebble in the pond ripples across the U.S. Treasury curve and really all other interest rates.

Since the market was expecting this increase, Treasury bonds, notes and bills had already priced it in, so there wasn’t much of a move after the announcement.

The statement said any future increases will be gradual, and you know what that means: don’t look for another hike anytime soon. The stock market moved sharply higher on that news.

What is a bit interesting is that the Fed adjusted their projections for inflation down and don’t expect to hit their 2% target until 2018.

They’re confused why inflation hasn’t picked up more with their easy monetary policy over the last seven years, either because they don’t see the deflationary forces we do, or they know they can’t admit to them. So Fed Chair Janet Yellen says it’s been pulled lower by temporary influences like lower energy prices.

But before we go forward, I want to give you a little background about the Fed and why this particular meeting was so crucial, besides obvious reasons.

The Fed schedules eight Federal Open Market Committee (FOMC) meetings per year.

In them, they review economic and financial conditions…

Determine the appropriate stance of monetary (interest rate) policy…

And reassess the risks to their long-term goals of price stability (inflation) and sustainable economic growth.

The FOMC consists of twelve voting members. Seven members are the Board of Governors of the Federal Reserve, plus the president of the Federal Reserve Bank of New York. The other four are rotating seats with a one-year term, who are presidents from other regional banks.