Will the Fed Raise Interest Rates This Week? | Charles Schwab

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Will the Fed Raise Interest Rates This Week?

December 12, 2016

Federal Reserve policymakers are set to meet this week, and many bond market investors believe the Fed will raise its key short-term interest rate on Dec. 14. 

“It certainly seems likely, based on the economic data we’ve seen, the upward trend in inflation and various comments from Fed officials over the past several weeks,” says Kathy Jones, chief fixed income strategist for the Schwab Center for Financial Research. “They’ve broadly hinted at a rate hike at this coming meeting.”

The Fed hasn't raised the federal funds rate target since December 2015. That marked the first such hike in nearly a decade, and many expected several more increases to follow in 2016. However, those expectations would later be quashed by slower-than-expected economic growth in the first half of the year, British voters' surprise decision in June to exit the EU—the "Brexit"—and uncertainty leading up to the U.S. presidential election in November, among other things.

Conditions have changed in recent months, however. Interest rates across the market have risen as steady gains in employment and inflation have bolstered the case for the Fed to raise its short-term rate. That rise accelerated after the November elections, when Republicans took the White House and maintained control of both houses of Congress. After years of gridlock in Washington, many now believe prospects are good for increased infrastructure spending, tax cuts, and possibly regulatory reform. Combined, these could spur both growth and inflation, leading the Fed to raise rates more rapidly than previously expected.

So what will the Fed do? Although central bank officials have suggested a rate hike is likely at its upcoming meeting, nothing is certain. Policymakers also will provide quarterly economic projections at this meeting, which could offer hints about the Fed's plans for next year. Based on the last set of economic projections—released in September—the Fed was estimating two or three quarter-percentage-point rate hikes in 2017. Could the optimistic post-election environment lead the Fed to boost those estimates? And if so, has the market priced that in? It should be interesting to find out.

As an investor, what should you be doing to prepare? Historically, Fed hikes have affected various investments and consumer loans differently. Some investments do well, some don't. If you've established a financial plan and built a diversified portfolio based on your goals and risk tolerance, you should be in a good position to weather any short-term volatility that might result if the Fed hikes rates this week.

Important Disclosures:

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market or economic conditions.

Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Supporting documentation for any claims or statistical information is available upon request.

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed-income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors.

Diversification strategies do not ensure a profit and do not protect against losses in declining markets.