With little fanfare and no real surprise, coming out of its December FOMC meeting the Fed announced it has boosted interest rates by 25 basis points. Coming into today, there was more than a 90% probability the Fed was going to do exactly that. As we shared earlier with Growth Seeker subscribers, today's November reports for both industrial production and retail sales pretty much killed the notion of a 50-basis-point hike.
What did change was the outlook for the number for potential interest rate hikes in 2017 to three from the prior two. Let's remember that in 2015 and 2016, the Fed increased interest rates all of two times. With that bumped-up outlook, the Fed's dovish bent remained intact and once again trotted out the much-used if not often-abused "data dependent" phrasing when it comes to those follow-on rate increases. Let's remember that over the last few years the Fed has often targeted raising rates, but did far less than it telegraphed for a variety of reasons. The message here is just because the Fed <I>thinks it might </I>raise rates, does not mean it eventually will.
As the market digested those comments, the S&P 500 traded off modestly, but was still off just 0.2% for the day as we write this. Interest rate-sensitive sectors, like financials and utilities, are responding as one would expect, given the prospects for one more hike in 2017 than previously expected. We need look no further than the Financial Select Sector SPDR Fund (XLF:NYSE), which is moving higher on the news, for evidence that the additional hike is viewed as beneficial for financials, while the Utilities SPDR (XLU:NYSE) is trading lower. Pretty much following the market's basic interest-rate playbook.
To us, the modest changes to the Fed's 2016 and 2017 economic projection, issued alongside the FOMC statement, was more interesting. That forecast showed a modest bump higher in both 2016 and 2017 GDP expectations to 1.9% and 2.1%, respectively, from the 1.8% and 2% forecast in September. Alongside those revisions, the Fed's unemployment forecast also ticked lower compared to September expectations. For 2018, the Fed still sees GDP at 2%, which suggests it isn't quite ready to forecast any increase in growth rates from the potential stimulus policies to be enacted by President-elect Trump just yet, even though the stock market has risen over the last five weeks.
Given all the jawboning and hinting with a wink-wink by Fed officials, this report is about as baby bear as one could expect.
Lenore Hawkins contributed to this report.