The Fed Raises Interest Rates: Are They Done For The Year?

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by: Russell Investments
Summary

Is the June Fed interest rate increase the last increase for 2017?

What’s the Fed’s plan for winding down their balance sheet?

How was the news in China this week? And what’s it mean for emerging markets?

Is the Fed done for the year?

In this week's episode of Market Week in Review, Sophie Antal Gilbert, program director, advisor insights, questioned Senior Investment Strategist Paul Eitelman about what's left this year for the U.S. Federal Reserve (The Fed).

Chair Janet Yellen made her announcements earlier this week. As was expected, the Fed raised interest rates by a quarter of a point. The hike wasn't a big surprise. The markets fully expected that decision and there was some justification for the move, primarily in the form of low unemployment rates in the U.S. What was more of a surprise was that we also saw some very low inflation numbers this week. Fed Chair Janet Yellen seemed almost complete undeterred by this inflation news. "That's a little bit of a worry," said Eitelman, "because it seems like inflation is going the wrong way. The Fed wants to get inflation up to 2% and it's actually starting to fall a little bit."

In the view of Eitelman and the other Russell Investments strategists, we think the Fed is done with rate hikes for 2017. The Fed is still talking about one more hike, but we disagree. As Sophie Antal Gilbert said, "We'll see who wins. You or Yellen."

Winding down the Fed's balance sheet

The Fed also laid out their plan to wind down their balance sheet-their portfolio of asset holdings. They stated that this wind down will be a slow, predictable process that will take place over approximately five years. This pace and predictability, according to Eitelman, will allow markets to "get ahead of these efforts." Yellen herself compared the process to "watching paint dry." Said Eitelman: that boring approach should be less disruptive.

There was little response to the rate change from U.S. equity markets, with the S&P 500Ò remaining relatively flat. Fixed income markets, according to Eitelman, were mostly impacted by this week's low inflation news: U.S. interest rates on the 10-year treasury yield fell to 2.15%.

The picture of Chinese growth

Switching to China, Eitelman pointed toward some encouraging news for the economy there. According to Eitelman, both domestic retail sales and industrial production activity were up in China this week. These numbers pointed toward regional stabilization, which may support the engine of growth expected in broader emerging markets.

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Date of first use: June, 2017