LPL Research thought it would be helpful to share top questions we have received given yesterday’s FOMC decision to raise interest rates.
Does the FOMC’s decision change LPL Research’s 2017 equity or fixed income forecasts?
We have not meaningfully changed our forecasts as a result of the Federal Reserve’s (Fed) decision at yesterday’s FOMC meeting. For details on our forecasts, please see our Outlook 2017 Executive Summary, and please look for our full Outlook 2017 publication scheduled for release on December 22, 2016.
What is LPL Research’s forecast for the 10-year Treasury yield?
We expect the 10-year Treasury yield to end 2017 in the mid-2.0% range, with a risk to the upside if meaningful fiscal stimulus is enacted.* This leaves bond prices as measured by the Bloomberg Barclays Aggregate Bond Index modestly higher with the majority of total returns driven by coupon income.
Does LPL Research think Fed rate hikes will derail the bull market?
No; we believe the bull market in stocks can coexist with the bear market in bonds. For more details, please see our Weekly Market Commentary, “Can’t Stocks and Bond Yields Just Get Along?”
What does LPL Research expect the Fed do in 2017?
We expect to meet the Fed’s forecast for the economy, labor market, and inflation in 2017; accordingly, we expect the Fed to raise rates twice in 2017 and quite possibly three times. The Fed’s statement following yesterday’s policy announcement increases the odds of a third rate hike next year.
Did the Fed’s language suggest it will continue to raise rates gradually?
Yes. Since the December 2015 FOMC meeting, the FOMC statement has included language that the Fed intends to make only gradual adjustments to its interest rate policy, which is generally supportive for equities. Fed Chair Janet Yellen reiterated this language during yesterday’s press conference.
Is there a disconnect now between the Fed and the market regarding interest rate expectations?
We do not see much of a disconnect between the Fed and the markets, although markets are unlikely to immediately fully price in a third rate hike following yesterday’s FOMC statement. We note that this general “agreement” between the Fed and the market is relatively new.
When is the next FOMC meeting?
The FOMC is scheduled to meet again on January 31-February 1, 2017.