The Federal Reserve finally raised short term interest rates off the near-zero level it has held since late 2008. While the rate increase was widely anticipated, the Fed’s release did little to clear up any uncertainty regarding the future of interest rates.
What the Fed provided was a graph showing where the Fed’s Open Market Committee expected short term interest rates to be over the next three years: 1.375%, 2.375%, and 3.25%, respectively. In other words, the Fed’s consensus is it will raise short term interest rates by a quarter of a percent every three months until the end of 2018.
“Considerable” improvements in the labor market and confidence that inflation will finally rise to the Fed’s preferred rate of 2% were the main justifications for their forecast.
So can we expect a string of higher interest rates from here? Not really. Fed Chair Janet Yellen emphasized subsequent rate increases would be “gradual.” She also acknowledged the Fed’s own forecasts have been often wrong in the past and are subject to change. A number of other factors, including asset prices, economic growth, a strong U.S. dollar, and overseas economic woes and the possibility of contagion will continue to be considered at each future Fed meeting.
Bottom line: the Fed thinks rates are going up from here, it wants rates to go up from here, but there’s a lot that can delay or kill the plan. For us, all of this means continued uncertainty regarding the exact path of interest rates, and now is probably not the time to bet heavily on higher or lower interest rates. And that’s okay; there are a lot of other things to sink our teeth into.