The Federal Open Market Committee’s minutes showed its plans to keep interest rates unchanged at its May 2 meeting, keeping the target range for the federal funds rate at 1.50% to 1.75%. Comments and insight from the FOMC increased the probability that the next rate increase would come in June after the FOMC meets for its fourth meeting in 2018 on June 12 to 13.
If the FOMC does raise rates in June, it will be their second increase for the year with the first increase reported in March. The June meeting is expected to see heightened interest due to the rate increase probability and since it also includes a press conference and update to the FOMC’s economic projections.
The FOMC’s comments and economic projections have many investors believing the Federal Reserve will raise rates either two or three more times in 2018. Key influencing factors for the Fed’s monetary policy will continue to focus on the following:
- Economic growth: The Fed believes the economy is now growing at a relatively faster pace after years of economic stimulus. Therefore, policy efforts in 2018 will be focused on monitoring growth with an inclination toward slowing growth rather than growth stimulus. To monitor economic growth, the FOMC is closely following real gross domestic product, which reported an annual growth rate of 2.2% in the first quarter. For 2018, the Fed is projecting real GDP growth of 2.7%.
- Inflation: The Fed continues to target a 2% personal consumption expenditures inflation rate. The most recent reading of PCE inflation showed a 2% rate. The Fed’s target for 2018 is 1.9%.
- Labor market: In 2017, the unemployment rate was 4.1%. The most recent reading showed a rate of 3.9%. The Fed’s projection for 2018 is 3.8%.
The Fed’s most recent dot plot shows the majority of FOMC members see the midpoint federal funds rate at either 2.0% to 2.25% or 2.25% to 2.50% in 2018. While there still may be three potential increases ahead, the changes the Fed has made since 2015 have already caused some substantial affects for the yield curve and the fixed-income investing environment overall.
Below is a current snapshot of the yield curve and how it has changed since 2015 when the Fed adjusted interest rates for the first time in seven years.
Source: U.S. Treasury
With rates on the rise, most tactical investors have been monitoring their investments diligently for potential gains and losses as rates increase. As rates rise, short-term cash investments become more attractive with bank certificate of deposits (CDs) and Treasuries reporting new highs in yield.
As investors look to keep their portfolios appropriately aligned while also seeking to benefit from market changes, below are some of the top fixed-income categories they may want to consider and their returns as of May 30.
CD and bond listings on the Schwab Trading Platform:
Source: Charles Schwab
Treasury exchange-traded fund index products:
Source: Morningstar
Disclosure: I do not currently own any of the investments included in this article.
