The path is clear for the Federal Reserve Bank (the Fed), our nation’s central bank, to raise interest rates this week for just the third time in almost eleven years. The Fed last raised interest rates this past December. It also raised rates in December 2015. Prior to that the last rate hike was in June 2006. The Fed controls what is called the "Federal Funds Rate." This is the short-term rate financial institutions, such as banks or credit unions, charge each other to borrow money overnight. The Fed controls these short-term rates, but not the long-term rates charged to you through mortgages, for example. The last major piece of economic news that had the chance to make the Fed pause was the February 2017 jobs report that was released last week. The report was strong. There were 235,000 jobs added last month, which was much better than the 200,000 economists were expecting. Job gains were widespread across industries with construction, education, and health care leading the way. Further, the jobs report also showed the unemployment rate dropped to 4.7% from 4.8% and wages were 2.8% higher over the past year. As a result, investment markets are pricing in a 100% chance of a rate hike by the Fed when their 2-day meeting ends Wednesday, March 15. Because this is a quarterly meeting, the Fed will hold a press conference and provide updated economic projections. These projections will give hints as to how quickly the Fed believes it should be raising rates going forward. Simply Money Advisors expects two interest hikes in 2017, but a third hike is possible if economic momentum picks up. The chance of a recession over the next six months is very low, below 5%. We believe the economy will grow between 2.0-2.5% in 2017, about how fast it's been growing over the past five years.
The Simply Money Point
With the economy (and by extension, corporate earnings) growing, Simply Money Advisors believes stocks should head higher throughout this year. While short-term interest rates may go higher, we believe that bonds will also generate positive returns this year, as long as the Fed doesn’t become too aggressive. Interestingly, the last two times the Fed has hiked interest rates, in December 2015 and December 2016, longer-term rates actually dropped, making it a good thing if you are invested in bonds.