Even though the US Federal Reserve's newly announced 25-basis-point increase in the federal funds rate was widely expected, the biggest surprise came from the "dot plot". This chart, which depicts the expected rate-hike path according to each of the Federal Open Market Committee members, showed a rise of 25 basis points more than anticipated for 2017, as well as three increases in 2018 and three more in 2019. This revision marks the end of a cycle of declining dots, and illustrates the FOMC members' confidence in the state of the American economy.
The US bond market has reacted to the Fed’s move with a bearish flattening of the US yield curve, with shorter maturities being affected by investors who are re-evaluating future rate developments. For its part, the US dollar has strengthened against all currencies.
We expect the environment for US fixed-income securities to be volatile, and we expect markets to react to the publication of any growth or inflation figures that could affect the path of future rate hikes. The upward correction in US Treasuries should not be linear, and the economic stimulus plans of the incoming Trump administration will likely not affect growth or inflation for 12 to 18 months—a significant delay. This backdrop is likely to make the Fed more data-dependent than ever.