Goldilocks Returns to the Markets

 

Federal Reserve Chair Janet Yellen broke little new ground at last week’s Federal Open Market Committee meeting, but if you listened closely, she made some news.

The FOMC raised the federal funds rate by 0.25% to between 0.75% and 1%, the third time the FOMC has hiked in the last 15 months. It also continued to insist it would raise rates three times this year. If it follows that script, fed funds would be 1.25-1.5% by the end of 2017.

But in her post-meeting news conference, Yellen expressed growing optimism. ”The simple message is the economy is doing well,” she said in plain English, a refreshing improvement over Fed-speak.

“We’re closing in on our unemployment objective, we’re coming closer to the inflation objective,” she said.

To me that indicates Yellen and the FOMC are turning their focus from employment to inflation, the other side of the Fed’s dual mandate. That implies “gradual” rate increases—at least three a year—for the foreseeable future.

What does that mean for markets?

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