In a widely expected move on Wednesday, the Federal Reserve decided to raise interest rates for just the third time in the last 10 years. The central bank raised the target range for the federal funds rate — the rate at which banks lend each other money overnight — by 25 basis points to a range of 0.75 percent to 1 percent. In historical context, those levels are still quite low.
Here are three takeaways from the Fed’s March interest rate announcement that investors should note.
Still on track for three rate hikes in 2017, as expected. The Fed indicated that nothing had changed from its forecasts in December, which called for three rate hikes in 2017. Not only does the Fed continue to see three rate hikes this year, but it also sees three rate increases in both 2018 and 2019 as well. That’s also on par with what the Federal Open Market Committee forecast back in December.
Importantly, markets had already largely adjusted to anticipate these widely telegraphed moves, so there was relatively little wavering in the bond markets. In fact, the 10-year Treasury yield fell from 2.6 percent to 2.5 percent in the minutes after the Fed announcement, so if anything, markets were expecting a slightly more aggressive rate of future rate hikes.
[See: 9 Ways to Invest in a Post-Election Market.]
Driven by a strengthening economy. The central bank cited a list of multiple economic indicators justifying its decision to raise rates, and part of the reason Wall Street was able to anticipate the decision so well was an unambiguously bullish February jobs report that was better than expected. According to the Bureau of Labor Statistics, the economy added 235,000 jobs in February, handily beating Bloomberg’s consensus estimate for job gains of 200,000.
In addition to the jobs report and low unemployment rate, which fell from 4.8 percent to 4.7 percent, the FOMC cited moderate rises in household spending and generally rising inflation figures as reasons for the rate hike. “Inflation has increased in recent quarters, moving close to the Committee’s 2 percent longer-run objective,” the FOMC press release read.
Bank stocks should see higher earnings. Over the long run, rising rates mean rising earnings for the financial sector and therefore bank stocks. As interest rates increase, so too do the banks’ net interest margins, the core driver of their earning power. Stocks like Bank of America (ticker: BAC), JPMorgan Chase & Co. ( JPM) and Morgan Stanley ( MS) have all rallied in the last year as investors anticipating rate hikes and less financial regulation under President Donald Trump sent the entire sector soaring.
That said, due to the fact that the Fed’s March rate increase was so widely anticipated, bank stocks really didn’t move much in the immediate aftermath of the announcement. In fact, due to the ingrained belief of some market participants that recent strong economic data justified four rate hikes in 2017, financials were the only sector of the stock market in the red on Wednesday.
[See: The 7 Best Bank Stocks to Buy for 2017.]
Long story short: The economy continues to slowly but meaningfully improve, and as long as that continues, rate hikes should continue more or less as expected.
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3 Things to Know About the March Interest Rate Hike originally appeared on usnews.com
