Rates Down After Fed Pushed Rates Up? Why?
The Fed raised the short-term Fed Funds rate yesterday by 1/4% to a range of 0.75% to 1.00%. And long term interest rates fell. Here are a few reasons why this happened.
First of all, the markets anticipated the increase and had already accounted for it. Rates actually improved after the increase was announced, in fact. This may have been b/c it created more “certainty” and the bond markets love certainty, and b/c the markets may have over-reacted previously.
In addition, the Fed gave no indication that it would change course in the future with respect to additional rate hikes (two more for this year, and three for 2018 as well).
Also, as we repeat often, the Fed Funds rate is a short-term rate only (that banks charge other banks to borrow money) and it is not the sole determiner when it comes to long term rates.
Long terms rates are heavily influenced by economic news (like GDP growth, retail sales, and employment numbers), inflation and the overall demand for bonds.
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