Does US Economic Development Support the Fed’s Rate Hike?
S&P 500 gains as the Fed increases the benchmark rate
The Fed hiked the benchmark rate of interest on March 15, 2017, meeting investor expectations based on the strong economic cues we’ve been seeing since 4Q16. US stocks rose slightly that day, with technology stocks leading the market after the Fed’s announcement. The Fed also confirmed that its tightening policy will be gradual in 2017. Overall, the market sentiment toward the Fed’s decision appears to be positive.
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Specifically, the Dow Jones industrial average (INDEX- DJIA) rose 0.17%, reaching 20,984 on March 15, 2017. The S&P 500 (INDEX-SPX) also rose 0.10%, reaching 2,387 the same day.
Reasons the Fed is increasing the interest rate
The Fed’s decision reflects the economy’s progress toward full employment and price stability. The following factors express the recent economic developments that likely led to the Fed’s rate hike on March 15:
- continued expansion of economy at a moderate pace
- solid income gains
- increasing consumer sentiment and spending
- unemployment rate at the low level of ~4.7% in February
- low level of labor market underutilization
- rising price index for personal consumption expenditures
The Fed also expects core inflation to continue on an uptrend and for overall inflation to stabilize at around 2% in 2017–2018, in line with its long-term objectives. Remember, economic growth in the US depends heavily on the ability of the economy to absorb an interest rate hike.
Notably, financial sector ETFs like the Financial Select Sector SPDR Fund (XLF) and the SPDR KBW Regional Banking ETF (KRE) are expected to benefit most from the interest rate hike. Some of the big banks included in these ETFs are JPMorgan Chasen (JPM), Wells Fargo (WFC), Bank of America (BAC), and Citigroup (C).
Continue to the next part for a look at the impact of Fed’s rate hike on the bond market.