One small rise in rates, one giant step towards normalisation

Don't you just love it when things turn out as expected?

Wall Street surely did. US equities jumped -- Dow up 0.5%, S&P up 0.84%, Nasdaq up 0.7%, Russell 2000 up 1.5% -- the VIX index dropped by 5.5% and instead of climbing, the US dollar index fell by 1.1% and the yield on 10-year US Treasuries fell by 10 bps to 2.5%.

And oh, commodity prices also soared. The Reuters/Jefferies CRB index closed 1.7% higher signalling optimism over global growth.

All these because fairy godmother Janet Yellen did what one and all expected - a 25 basis point lift in the federal funds rate to 0.75%-1.0% last night.

"In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 3/4 to 1 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation."

As for market trepidation over its balance sheet tapering,

"The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions."

Policy normalisation here we come ... but gently, gently.

"The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run."

This is underscored by the 'virtually unrevised' revised dot plots - still three interest rate hikes this year with the median forecast for the fed funds rate at 1.4% this year and 2.1% in 2018 (unchanged from the December projections) but lifted to 3.0% (from 2.9% in December) in 2019.

Of course, there's the usual caveat - the Fed has to cover its behind - just in case.

"...the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data."

So far, the economic and survey data released on the day the Fed announced its monetary policy decision suggest its steady as he goes ... up.

US headline CPI inflation accelerated to 2.7% in the year to February - the fastest rate since March 2012 - from 2.5% in the previous month. Core inflation eased to 2.2% from 2.3% but remains above the Fed's 2.0% target. Note that core CPI inflation had been closely tracking the Fed's favoured inflation gauge - the core PCE price index - in recent times (up 1.7% in the year to January).

Similarly, retail spending remained robust. Retail sales rose by 0.1% in February and core retail sales - ex autos - by 0.2% in line with expectations. Even better, January's monthly expansion in retail spending was significantly bumped up to 0.6% (from 0.4% initially estimated) while core retail sales was upgraded to 1.2% from 0.8%.

Compared to a year before, both headline and core retail sales continued to grow at a solid 5.7%.

These indicate that "incoming data" are coming in line with the Fed's expectations, perhaps even on the strong side.

Read more: FedCPIUS TreasuriesDowJanet YellenNasdaqReuters/Jefferies CRBRussellS&PTreasuryVIX
Editor's Choice
The Productivity Commission has released its anticipated draft report on alternative default models in superannuation, looking at ways to introduce more competition in a system where members do not exercise fund choice.
Following research into the future of product innovation and development, Nikko Asset Management Australia has created a new executive role to drive the firm's product agenda.
New-York based financial firm Goldman Sachs is planning to launch an ETF which will invest in high-yield corporate debt, according to documents filed with the US Securities and Exchange Commission.
Two Contango MicroCap (CTN) directors were removed following an extraordinary general meeting and a third resigned prior to resolutions being passed.
Brought to you by
8 FEB 2017
This year marks the 23rd anniversary of the launch of Hunter Hall's Value Growth Trust, a fund that championed ethically-screened global equities investing in Australia. Since then, the fund manager has ...
Get it Daily
Keep up to date, don't be the last to know! Get the Financial Standard Daily Newsletter.
Pocket investment guides featuring adviser case studies and a glossary.
Investing trends and strategies from the industry’s thought leaders.
Putting the spotlight on investment products that matter.
Expert Feed
Christopher Page
A new era
After years of back and forth, the legislation to increase the professional standards of financial advisers has been passed. The new ...
Stephen Fay
Starting at the insurance base camp with focus on value
Insurance can be a complex beast, but in a period where its reputation may be strained it is all the more important to talk of some ...
Christopher Page
Redefining the family office
While the family office model has traditionally been the preserve of the ultra-rich, this may be changing very soon. Last week, Findex ...
Michelle Baltazar
Like rocket fuel to a Spaceship
When a superannuation fund calls itself a Spaceship and nobody bats an eyelid, you know you're entering a new era in retirement investing. Spaceship's ...
Featured Profile
Professional Subscription for $295
(inc GST) for 1 year.
FS Advice
The Australian Journal of Financial Planning.
Get the free iPad app
Download the Financial Standard iPad app for FREE.
Link to something Up2CCEpT