So the Fed did in fact raise their rate 0.25% yesterday, and over the next three hours, both stocks and bonds rallied. The MBS market in fact, jumped 75bps, allowing mortgage rates to settle back into their pre-meeting groove. What gives? During her speech, Janet Yellen gave several cues (or should I say “coos”–ha ha) that indicate that the Fed may be lowering its expectations on the speed that the economy should be expanding.
The first is the observation that core inflation, excluding food and energy costs, is still under the target 2.0% growth rate that the Fed is expecting. They want the growth centered on 2.0% (allowing for readings higher or lower that 2.0%) whereas before, the target was the 2.0%-2.5% range. The second cue that all is not rose petals and puppy dogs is that the vote to hike rates yesterday was not unanimous; there were voting board members in favor of leaving rates unchanged. Still it happened, and still, Ms. Yellen is planning on three 0.25% rate hikes this year and next year.