The minutes from the Federal Reserve’s (Fed) most recent policy meeting sent a message to markets that it would continue its gradual pace for hiking interest rates as it continues to navigate the challenging process of policy normalization it started in December 2013, when it announced it would start tapering bond purchases. As shown in the LPL Chart of the Day below, the minutes triggered a reversal in market implied expectations for a fourth rate hike this year, which had been rising since the actual meeting took place at the beginning of the month amid generally positive economic data over the subsequent weeks:
Looking ahead, while policy normalization can often come with increased market volatility, this kind of volatility is the natural companion to a healthy economy being driven by a more traditional business cycle. LPL Research Chief Investment Strategist John Lynch explained, “The possibility of a policy mistake remains a risk, but we continue to believe the economic growth that has led the Fed to raise rates is a more potent force than the higher rates themselves, and that the economy can continue to tolerate policy normalization at a gradual pace.”
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