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

From Omar Aguilar, Ph.D.: Global equity markets had fully priced in the Fed’s quarter-point rate hike, so the decision last week came as no surprise.

Of far greater interest was the rationale behind the decision, as well as Fed forecasts regarding future policy adjustments. Overall, equity markets took the news in stride, reflecting apparent comfort with the gradual but accommodative approach that the Fed presented.

Economic stability and inflation on track

The Fed seemed comfortable with the relative health of the U.S. economy and pace of economic growth, both of which have benefited from improving labor market conditions and a trend toward a healthier rate of inflation. In fact, unlike forecasts at the time of other recent rate hikes, expectations for inflation in 2018 and 2019 are now within the Fed’s target of approximately 2.0%.

Market stability will remain an important factor

Fed Chair Janet Yellen is naturally dovish, and has been intentionally cautious to adjust Fed policies as transparently as possible. A question mark remains, however, as to how the Fed’s latest decisions and rhetoric will affect the U.S. dollar. If the dollar strengthens, headwinds could arise for the economy, and for multi-national corporations based in the U.S. Political risks in Europe could also weaken the euro, complicating any strong dollar effects. Financials, Technology, Energy, and Materials stocks seem well positioned to benefit from such an environment.

The iShares Barclays Aggregate Bond Fund (NYSE:AGG) was trading at $108.46 per share on Wednesday afternoon, up $0.19 (+0.18%). Year-to-date, AGG has gained 0.37%, versus a 4.63% rise in the benchmark S&P 500 index during the same period.

AGG currently has an ETF Daily News SMART Grade of B (Buy), and is ranked #6 of 29 ETFs in the Intermediate-Term Bond ETFs category.

Read more insights from Omar at:

This article is brought to you courtesy of Charles Schwab Investment Management.

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