Schwab: Fed Decision Was Already Fully Priced Into The Bond Markets

by Jared Lewis March 24, 2017, 0:19
Schwab: Fed Decision Was Already Fully Priced Into The Bond Markets

The Fed sees the possible economic expansion as signs that things are more stable now and this allows them to get interest rates back to a realistic level.

For the third time since December 2015, the Federal Reserve has made a decision to give us a gift we will remember and keep paying on for years.

Projections from Bank of America paint a bullish picture of the liquidity landscape. That's particularly true of variable rate loans that move with the prevailing interest rate.

The yield on the 30-year U.S. Treasury bond rose to 3.215% last Tuesday, testing its 52-week high of 3.215% set on December 12.

Granted, if the pace of rate increases changes, it could stir up volatility again. But immediately after the November election interest rates have been skyrocketing for a few reasons, going up well over one percentage point.

The Federal Reserve's decision to increase interest rates last week could do more than cost you more for a mortgage or auto loan, it could increase your credit card bill as well. "That's assuming everything runs smoothly and the economy continues to grow". Last week, the Federal Reserve voted to raise rates by a quarter point.

Investors anxious about the resilience of the global rally in the face of a recent sell off still have one big reason to keep on partying: Central banks haven't yet taken away the liquidity punch bowl that has supported global asset prices for the past eight years.

It's important to note that the Fed Funds rate (what banks charge other banks for overnight borrowing) is still very low in historical terms. As interest rates rise, bond prices generally fall; these risks are now heightened because interest rates are at or near historical lows.

Regarding retirement accounts, stick with your original plan and don't overthink a modest interest rate change-although it may be worthwhile to review the investments behind your 401 (k) and adjust them if they are not meeting your needs on returns within your risk tolerance.

A tighter Federal Reserve policy may also prevent longer-end inflation from accelerating much further, with five-year inflation forwards due in five years already at 2.40 percent, matching policy makers' consumer-price inflation target.

Now, the trend is shifting as employment appears full and inflation is gaining steam. Now 30-year mortgages are around 4.30 percent.

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