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Well in a completely expected Fed meeting Yellen and friends raised rates by another 0.25% and rate sensitive investments such as REITs, (which had been hammered for two weeks) had their best day in months. This was likely due to the Fed’s updated guidance which showed just two more planned rate increases this year, instead of the three that had been rumored on Wall Street due to rising inflation rates.
Interestingly enough the 10 year Treasury yield dropped nearly 10 basis points the day of the hike, and is now pretty much unchanged from the 2.5% it was prior to the Fed’s December hike. This kind of spread compression (short-term rates rising but long-term rates standing still) could indicate that the market doesn’t yet buy into the story that the US economy has finally achieved take off velocity. In fact, the Atlanta and New York Fed’s real time GDP predictors were both revised downwards this week, to just 0.9%, and 2.8%, respectively, with even slower growth expected in Q2.
That contradicts the solid jobs report we had, that showed strong job creation, rising labor force participation, and decent wage growth. We’ll just have to wait which of these indicators is correct. But if Congress doesn’t manage to get tax reform passed this year, (which is looking increasingly likely) then the “animal spirits” that have sent markets to such lofty levels might finally give ground and we could get that market wide correction that is now so much overdue. Of course such an event would be great for us, since it means many, MANY more buying opportunities.