Today’s decision by the Federal Reserve on the fate of interest rates is like Goldilocks’ just-right bowl of porridge.
As expected, the Fed raised the benchmark Federal Funds rate by 25 basis points. But the rate hike alone wasn’t the Goldilocks number.
The “just right” number came from the so-called Fed “dots.” These indicate where members of the central bank think interest rates will be at the end of this year, year-end 2018 and year-end 2019.
Those dots show that the Fed plans to hike rates two more times this year, for a total of three hikes (including today’s move). Moreover, in 2018 the Fed dots also show three hikes.
This consistency of this pace of likely rate hikes over the next couple of years is the Goldilocks showing the bulls had hoped for. As a result, the Dow surged more than 100 points to close just under the 21,000 mark.
The greenback fell sharply vs. rival foreign currencies, with the PowerShares U.S. Dollar Index Bullish Fund (UUP) falling to one-month lows.While the equity bulls took their cue from Yellen & Co. and pushed stocks higher, there was a reaction in the U.S. dollar and gold that wasn’t generally anticipated.
Meanwhile gold, which has come under pressure since late-February on assumptions the Fed would indeed hike rates at today’s meeting, actually perked up after falling below the $1,200 mark earlier in the session.
The fall in the dollar and the rise in gold were largely relief rallies. That is, rallies that took place because the Fed wasn’t as aggressive as they might have been on the future pace of rate hikes.
Then there were bond yields, which you might expect to have risen given the Fed’s move today. Yet that’s not what happened.
The yield on the benchmark 10-year Treasury note fell to 2.508%, or more than a 3% decline from yesterday’s closing yield.
Here again, this is likely due to the Fed delivering its measured message today on the pace of interest rates going forward.
One takeaway here is that Wall Street got its Goldilocks bowl of porridge from the Fed. Yet, the markets still seem confused.
With rates going up, you would expect there to be a rise in the dollar, a decline in gold, a jump in bond yields … and even a pullback in equities.
Yet this is the market circa 2017. Now, stocks keep surging despite what some say are record-high valuations, and despite rising interest rates.
That leaves us to conclude that this market remains all about the lofty pro-growth policy expectations of the Trump administration.
Yes, the Fed is hiking rates because the economy, inflation and the job market have improved. Clearly, they feel that the economy can handle another quarter-point rate hike.
But stocks aren’t trading at all-time highs because of that.
Instead, stocks are surging on hopes that the president and Congress can get healthcare reform, continued regulatory reform and a corporate tax cut enacted.
That is the hope that keeps the bullish fuel burning. And now that the unknown of the Fed is, well, known, look for Wall Street’s collective eyes to turn to Washington.
The SPDR Gold Trust ETF (NYSE:GLD) rose $0.29 (+0.25%) in premarket trading Thursday. Year-to-date, GLD has gained 6.06%, versus a 6.90% rise in the benchmark S&P 500 index during the same period.
This article is brought to you courtesy of Uncommon Wisdom Daily.