Low unemployment, inflation and economic growth have convinced the Federal Reserve to raise the federal-funds rate by a quarter percentage point Thursday putting it now between 0.50% and 0.75%.
The move, expected to cause household and business borrowing costs to rise will be followed by additional rate hikes in 2017, according to Fed officials.
The Year Ahead
Officials indicated a positive economic outlook would likely pave the way for 3 quarter-point moves over the next year, adding another 0.75% to the benchmark interest rate.
All this thanks to an unemployment rate that recently hit a nine-year low, potential tax cuts and increased government spending by President-elect Donald Trump once he takes office. The federal funds rate should be 1.4% by the end of 2017, officials said.
Impact On M&A
Matt Porzio, VP of M&A Strategy and Marketing at IntraLinks, indicated that the global deal making community was expecting the Fed rate decision and has planned accordingly. IntraLinks Deal Flow Predictor for Q4 2016 predicted that 2017 would see an increase in deal volume and Porzio doesn’t seem to think anything has changed significantly.
Said Porzio, "The interest rate hike was built into many dealmakers' valuation analysis, and a .25-point bump is marginal. I might even argue that it's much-needed. We are still in historical lows with strong economic fundamentals, including corporate earnings, low unemployment rates, and anticipated deregulation across industries by the new Trump administration. This rate hike would have happened regardless of which candidate won the election, and will have a minimal impact to foreseeable U.S. deal flow.”
Dow Jones Backs Off
The Dow Jones industrial average backed away as the Fed raised rates for the first time in a year. As a result, the Dow ended down nearly 120 points to 19793 after 7 straight record closes. The Standard & Poor’s 500 index fell 0.8% to 2253. The Nasdaq composite dropped 0.5% to 5437.
The Treasury 10-year yield rose to 2.57% as the dollar rallied and oil prices were lower. U.S. crude was down 3.7% at $51.04 on both the strong dollar and concern about oversupply in the pipeline.
The Big Picture
While the Fed painted a generally upbeat picture, things could happen to impact the plan moving forward. Business investment has been soft. If it stays soft that could have a negative effect on the economy overall.
Mortgage rates have already risen some and are expected to rise more. The strengthening dollar could exert negative pressure on U.S. exports, as could anti-trade action by the incoming Trump administration.
All these things could cause the Fed to reverse course and raise rates more gradually than planned. It’s worth noting, however that inflation without food and energy costs factored in is close to 1.7%. The Fed’s target is 2%.