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How Will Rate Hike Affect Investors?

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RANDY FREDERICK: This week the Federal Reserve finished its final meeting of 2017, which was also the final meeting for Janet Yellen. Liz Ann Sonders joins me for the December 14th Schwab Market Snapshot, to give us her perspective on the Fed’s outlook, as well as some important changes that will be taking place within the committee.

So, Liz Ann, as expected, on Wednesday, the Fed raised interest rates by a quarter-point for the third time this year. Now, that was no surprise, but there were some important changes to the policy statement. So what is the Fed’s economic outlook for next year, and, more importantly, how many interest rate hikes are they expecting?

LIZ ANN SONDERS: So every other Fed meeting, as you know, they update their forecast for where interest rates are going to be at the end of each calendar year. And, as you mentioned, they raised rates three times in 2017. They expect to raise three more times in 2018, which is in keeping with what we view is probably the appropriate slope. Two interest rate increases in 2019 and another two in 2020, and they did add one to 2020.

But what garnered a bit more interest, probably rightly so, was the adjustments they made to their economic forecasts. Now, in particular, they lowered their expectation for the unemployment rate both the end of this year, as well as the end of 2018. They upped their real GDP forecast for this year and next year.

But what they did not do, which many might have expected them to, given stronger growth, lower unemployment rate, was adjust their inflation forecast. So the Fed’s preferred measure is core PCE. They stayed at 1½% for 2017, 1.9% for 2018. As you know, Randy, both of those are below the Fed’s 2% inflation target. So I think that was the most important takeaway from yesterday.

RANDY: Well, at our Schwab live event in Dallas yesterday, you had a conversation with former Dallas Fed President, Richard Fisher, and I know that one of the topics you talked about was that passing off of the baton from Janet Yellen to the new Fed Chair, Jay Powell.

So, for those who didn’t have had a chance to see that, can you tell us what Richard Fisher’s thoughts were on that transition, as well as just general thoughts about Jay Powell?

LIZ ANN: Sure. So there’s a number of vacancies that still have to be filled in terms of the Fed Board of Governors, the makeup of the Federal Open Market Committee. But, clearly, the one that has captured most attention has been this transition that we now know will be from Janet Yellen to Jerome Powell--Jay Powell, as he is known for short. And it was a fascinating conversation with Richard Fisher, but he had a couple of interesting things, in particular, to say, actually, about both of them.

He’s a huge fan of Janet Yellen, and he said he’s sorry to see her go, but he thinks she’s making the right decision. She’s kind of going out on top, on a high. He thinks she did a terrific job. And he also has terrific things to say about Jay Powell. One of the interesting ones was—it relates to how we generally try to categorize folks on the Federal Open Market Committee by using the terms either “dovish” or “hawkish.” 

He said the way that he thought about monetary policy when he was making those decisions was that his goal was to be a "wise owl", as opposed to either a "hawk "or a "dove". And he views Powell to be a perfect wise owl. He does not have a Ph.D. in economics. He’s gotten criticized for that.

I actually agree with Richard Fisher, which--maybe that’s a great thing because he’s actually got a strong background in markets. So it’s not just an academic approach that he brings, it’s a practical approach. And he has been voting in line with the Fed since he joined in 2012. So I think that continuity that it represents has probably been one of the settling factors for the market.

RANDY: So it sounds like that practical knowledge may turn out to be just as important as the academics. Thank you so much, Liz Ann.

Listen, if you want to read more from Liz Ann, you can do that in the Insights & Ideas section of Schwab.com. You can follow Liz Ann on Twitter @LizAnnSonders, and, of course, you can always follow me on Twitter @RandyAFrederick. We’ll be back again. Until next time, invest wisely. Own your tomorrow.

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