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Will the Fed Stick to Its 2017 Target?

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Expected interest rate hike in 2017

The US Federal Reserve hiked interest rates by 25 basis points on December 14, 2016. However, more concerning from the investors’ point of view was the targeted hike of 75 basis points in 2017. The Fed has now increased its projected rate hike from two quarter-point increases to three quarter-point hikes from its September 2016 estimate.

Notably, in the past eight years, the Fed has increased benchmark interest rates by only half a percentage point. But we should note that the Fed often overestimates its rate hikes. In 2016, it projected four hikes and delivered only one.

fed's dot plot

Although the move was widely expected, we saw a broad-based sell-off in the markets. According to the above dot plot, the Fed sees three interest rate hikes in 2017, while the previous dot plot implied two rate hikes in 2017.

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Why the Fed seems so aggressive in 2017

The primary reason behind Fed’s aggressive rate hike target for 2017 could be President-elect Trump’s infrastructure spending plans and proposed tax cuts. The picture on the estimated rate hike is likely to get clearer when the Fed will release the meetings of its December meeting this week.

The yield on the ten-year Treasury Note surged to 2.60% after the 25 basis point hike on December 14, 2016. If the Fed sticks to its plan and delivers, this yield is likely to jump significantly, and we may see a sell-off in defensives like utilities (DUK) (SO) (NEE). Investors could also dump bond substitutes like utilities in order to de-risk. But remember, the Fed has a long history of missing its expected rate hikes and economic growth estimates.

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