Federal Reserve Federal Open Market Committee (FOMC) Rates Decision FAQ

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.

 

IMPORTANT DISCLOSURES

* Basis for forecast: Scenario analysis based on this potential interest rate range and the duration of the index indicates low-to-mid single digit returns for the Barclays Aggregate Bond Index.

The economic forecasts set forth in the presentation may not develop as predicted.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.

The Federal Open Market Committee (FOMC) is the branch of the Federal Reserve Board that determines the direction of monetary policy. The eleven-person FOMC is composed of the seven-member board of governors, and the five Federal Reserve Bank presidents. The president of the Federal Reserve Bank of New York serves continuously, while the presidents of the other regional Federal Reserve Banks rotate their service in one-year terms.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise, and bonds are subject to availability and change in price.

The Barclays U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment-grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS, and CMBS (agency and non-agency).

The presidents of regional Federal Reserve Banks are commonly classified as hawks or doves. Hawks generally favor tighter monetary policy, with less monetary support from the Federal Reserve. Doves are the opposite, generally favoring easing of monetary policy.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

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