What's going on?

The US Federal Reserve (�the Fed�) once again raised its target interest rate � and all investors did was shrug!

What does this mean?

It was widely expected that the Fed would raise interest rates (by 0.25%, to a range of between 1.5%-1.75%), which is partly why investors were so unfussed. The Fed�s committee members suggested that they expect interest rates to go up a touch faster than they�d previously thought, which could have been taken as a signal that the Fed will quicken its pace of interest rate hikes. However, the Fed�s new chairman later downplayed the importance of these projections � leaving investors� expectations for future interest rate rises broadly unchanged on the day.

Why should I care?

For markets: Not much to see here� for now.

Investors initially reacted as if interest rates were expected to go up more quickly, but those moves largely reversed following the Fed Chairman�s comments, leaving both stocks and bonds back where they were at breakfast time. Interestingly, the US dollar fell in value, suggesting investors may have expected a more definitive signal that the Fed would raise its interest rate more quickly (generally investors buy currencies when they think they will get paid a higher interest rate � more on that here).


The bigger picture: There�s a disconnect between the Fed�s projections and what the bond market is implying.

The Fed�s current projections suggest its target interest rate will rise 0.75-1% this year and about the same again next year. This is a fairly rapid pace � at least relative to the past decade. So why is a US government bond that expires in 10 years still only paying investors less than 3% annual interest? It seems that either the Fed�s interest rate won�t meet its own projections � or that US government bonds will have to sell off further in order to offer a higher rate of interest, a.k.a. yield (how does that work? Click here).