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Investment strategies: June rate hike as expected; but what’s next?

By: Bob Post, SVP, Chief Investment Officer

Probabilities for possible Fed moves expected in the marketplace have been spot on ever since the Fed began hiking interest rates back in December 2015, and their meeting a couple of weeks ago was no different. The market had widely anticipated the rate hike that occurred at the June Federal Open Market Committee (FOMC) meeting; however, there were two items of note: the possibility of an extra rate hike and more transparency from the FOMC.

Additional rate hike predicted, more transparency anticipated

The first notable outcome of the FOMC’s meeting was a slight change in the voting members’ median dot plot forecast for the remainder of the year; the committee now sees the potential of a fourth move occurring in 2018 rather than just three hikes from the last dot plot forecast in March. (To learn more about dot-plot forecasts, check out this recent article.)

The second notable outcome of June’s meeting was Fed Chairman Powell revealing in his post-meeting press conference that, beginning in January 2019, he will hold a press conference after each FOMC meeting (as opposed to every other meeting). Powell stated these regular press conferences should increase the transparency of the Fed but should not be construed as a change in the path of rate changes. The dot plot forecast will continue to be released at every other meeting.

So, looking at the forward curve and rate-change probabilities today, the market sees the September 26 FOMC meeting as the most likely date that the Fed will move again on rates. Until then, the economy is predicted to remain on a solid growth trajectory while facing continued headlines and threats of possible tariff and trade concerns.

What this means for your credit union

While the Fed moved the target range higher by 25 basis points (for a new range of 1.75% to 2.00%), the interest on excess reserves rate (IOER) was increased by only 20 basis points. The IOER increase was viewed by the marketplace as more of a technical adjustment, pointing to the fact that the Fed Funds effective rate has moved higher over the past few months. The market reaction to overall target rate increase was muted, and the curve continues to flatten as short-term rates increase with little change to the longer end of the curve.

Longer-term, the Fed still sees short-term rates, including the overnight rate, topping out at 3.40% in 2020, which indicated no change from March’s forecast. Their statement noted strength in economic activity and household spending. The Fed now sees the unemployment rate dropping to 3.6% by end of 2018 and declining further to 3.5% in 2019.

As the FOMC continues to normalize interest rates, Corporate One is here to offer suggestions on strategies for your investment portfolio, not only to offer protection for higher rates but also to help your portfolio benefit from those higher rates. One strategy to keep in mind is to stick with a laddered approach; manage your investment portfolio to compliment the overall balance sheet. Because market timing typically doesn’t work well for fixed-income investing, laddered strategies should help insulate the portfolio from fluctuations in interest rates.

For more information on investment strategies for your credit union, I hope you’ll reach out to our senior investment representatives here at Corporate One. We are happy to consult with you on a customized strategy that best fits your credit union’s needs.