Rate Hike Offers Little Surprise
Most of the increase appears already baked into stock prices, although opportunities still exist.
In a widely anticipated move, the Federal Reserve on Dec. 14 raised its target for the federal funds rate by 25 basis points, to 0.50%-0.75%. In addition, the central bank cited improving economic conditions that could support an additional 75 basis points of rate increases in 2017.
Low Inflation, Lackluster Business Investment Support Cautious View
As we noted ahead of the Federal Open Market Committee meeting, inflation is still below the committee’s 2% goal and business fixed investment remains below desired levels. We believe these data points support our view that low real interest rates are needed to ensure full utilization of labor and capital for some time. We incorporate a federal funds rate of 2.25% and a 10-year Treasury yield of 3.5% by 2020 into our valuation models. The FOMC appears to agree, predicting only gradual increases in its target and an extended period of low rates by historical standards.
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