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How Will Expected December Interest Rate Hike Affect Markets in 2017?

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RANDY FREDERICK: Interest rates have been rising since the beginning of July, but since the election they’ve spiked sharply higher. Kathy Jones, Schwab’s chief fixed income strategist, joins me for the November 29 Schwab Market Snapshot to discuss why this happened, and what the bond market might be trying to tell us. Welcome back, Kathy.

KATHY JONES: Thanks for having me, Randy.

RANDY: So, Kathy, interest rates had already been on the rise for about four months prior to the election, but then they really took off following the Republican sweep on November the 8th. So why did that happen, and is this something that we can expect to continue?

KATHY: The election really accelerated the trend that was already in place by boosting the prospects for a lot more fiscal stimulus than we were anticipating. You know, after seven years or so of gridlock in Washington, now we have the prospect of tax reform, of some infrastructure spending, and probably broad-based tax cuts and regulatory reform. And all those things combine to raise the prospects that growth is going to pick up and inflation. And if you get higher inflation, then the prospects are that the Fed will probably be raising rates more rapidly than we had previously expected. So all those things contributed to the higher trend in bond yields after the election.

RANDY: You know, Kathy, I never thought that I would see the Fed Funds Futures show a 100% probability of an interest rate hike before any Fed meeting—and yet that’s exactly what we’ve been seeing for about the past week and a half. So is a rate hike an absolute certainty on December the 14th? And, if so, what does that mean for interest rates going into 2017?

KATHY: Well, it certainly seems highly likely based on, you know, the economic data that we’ve seen, the upward trend in inflation that’s already in place, and then, of course, from the various comments that we’ve heard from Fed officials over the past couple of weeks. They’re really broadly hinting at a rate hike at this coming meeting. I think what’s more interesting, as you mentioned, is what’s going to happen next year. Based on the last set of economic projections they provided in September, the Fed was estimating three quarter-point rate hikes in 2017. If we have all these changes taking place now in the political environment that boosts growth and inflation, they may bump that up a bit, and the market isn’t quite prepared for that. It’s not really pricing in three rate hikes or more for next year. So that’s really what we’re going to be watching at this meeting.

RANDY: Yeah, that makes sense. So let’s shift gears just a little bit. Interest rates and equities are not the only thing that have been rising lately. We’ve also seen a pretty impressive run in the dollar, and usually the dollar rising is seen as a net negative. What does the strengthening dollar mean right now for bond investors?

KATHY: Generally speaking, for bond investors, a strong dollar is a positive because a strong dollar tends to hold down inflation because it pushes import prices down. And then the other thing it does is it tends to draw in foreign capital, because as the dollar moves up it makes investing in the U.S. more attractive. And already we’re seeing an attractive U.S. bond market relative to other major markets because our interest rates are so much higher. So I think if the dollar continues to move up next year as we anticipate, we’ll probably see that foreign capital come in, and that will be a positive for the bond market.

RANDY: Definitely. Well, that’s about all the time we have for now. As always, Kathy, thank you for your unique perspective.

Listen, if you have questions, please call and talk to a Schwab financial professional. You can read more from Kathy in the Fixed Income and Investing Insights section of You can follow Kathy on Twitter @KathyJones. And, of course, you can follow me on Twitter @RandyAFrederick. We’ll be back again. Until next time, invest wisely. Own your tomorrow.

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. Please note that this content was created as of the specific date indicated and reflects the author’s views as of that date. It will be kept solely for historical purposes, and the author’s opinions may change, without notice, in reaction to shifting economic, business, and other 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.
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.

Schwab does not provide tax advice. Clients should consult a professional tax advisor for their tax advice needs.

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

Schwab Center for Financial Research (“SCFR”) is a division of Charles Schwab & Co., Inc.


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