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Bullish Outlook from Fed Strengthens Case for Rate Hikes

Feb 22, 2018

Following a prolonged period of broad stock market growth, it would seem to be the Fed’s turn to grab the bull market by the horns. The sentiment taken from the Fed’s meetings minutes on Wednesday is that the U.S economic growth outlook appears to be strong, perhaps a bit too strong for their liking. While increased free capital from the $1.5 trillion tax cut, a steady level of unemployment at 4.1%, and improving hourly wages may appear to be positive indicators for equity markets, they may in reality be working against investors. The Fed, eager to contain inflation to a target level of 2% appears to be leaning toward further hikes in 2018. Investors hoping recent market volatility would force the Fed to change course regarding their planned hikes may find themselves disappointed.

The release of these hawkish comments did not immediately impact equities as investors took time to digest the news. A negative market response took effect later, however, with the S&P 500 sliding 0.6% by the Wednesday’s close, erasing 1.2% gains from earlier in the day.

On comments from the Fed, bond yields surged. The yield on 10-year Treasuries closed at 2.943%, reaching a 4 year high. The negative correlation between bond yields and the value of equities has come into focus as further hikes get closer. Investors would be advised to keep note of any Fed comments that could be perceived as aggressive towards combating inflation, as they may foreshadow even more rate hikes than the 3 presently expected.