The FOMC hiked the US policy rate 25bp:
Information received since the Federal Open Market Committee met in November indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. Averaging through hurricane-related fluctuations, job gains have been solid, and the unemployment rate declined further. Household spending has been expanding at a moderate rate, and growth in business fixed investment has picked up in recent quarters. On a 12-month basis, both overall inflation and inflation for items other than food and energy have declined this year and are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Hurricane-related disruptions and rebuilding have affected economic activity, employment, and inflation in recent months but have not materially altered the outlook for the national economy. Consequently, the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong. Inflation on a 12‑month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.
In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-1/4 to 1‑1/2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
Voting for the FOMC monetary policy action were Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Patrick Harker; Robert S. Kaplan; Jerome H. Powell; and Randal K. Quarles. Voting against the action were Charles L. Evans and Neel Kashkari, who preferred at this meeting to maintain the existing target range for the federal funds rate.
As always, it’s interesting to read about the dissent, which we may expect to see fleshed out in speeches. The accomplished and confident nature of the FOMC’s members is such a contrast to the pompous declarations we read in Canada!
The implementation note states:
The Committee directs the Desk to continue rolling over at auction the amount of principal payments from the Federal Reserve’s holdings of Treasury securities maturing during December that exceeds $6 billion, and to continue reinvesting in agency mortgage-backed securities the amount of principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities received during December that exceeds $4 billion. Effective in January, the Committee directs the Desk to roll over at auction the amount of principal payments from the Federal Reserve’s holdings of Treasury securities maturing during each calendar month that exceeds $12 billion, and to reinvest in agency mortgage-backed securities the amount of principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities received during each calendar month that exceeds $8 billion. Small deviations from these amounts for operational reasons are acceptable.
In another move that could tighten monetary conditions, the Fed confirmed that it would step up the monthly pace of shrinking its balance sheet, as scheduled, to $20 billion beginning in January from $10 billion.
Markets seem to have been hoping for more fire and brimstone:
An improving economic outlook should give the upcoming Jerome Powell-led Fed a free pass to continue along Yellen’s gradualist path toward interest-rate normalization. In a key change to its statement, the Federal Open Market Committee omitted prior language saying it expected the labor market would strengthen further. The dollar and Treasury yields were already falling after the so-called core gauge of U.S. inflation, which excludes food and energy costs, unexpectedly slowed. Yellen said elevated stock prices doesn’t mean equities are overvalued.
“Markets are generally interpreting the meeting as a dovish hike,” said Marvin Loh, senior global market strategist at Bank of New York Mellon Corp. in Boston. “The improved view in 2018 may be driven by tax reform, which will not have a long-lasting impact.”
PerpetualDiscounts now yield 5.30%, equivalent to 6.89% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 3.70%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 320bp, a slight (and perhaps spurious) widening from the 315bp reported December 6.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
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| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0330 % | 2,472.7 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0330 % | 4,537.2 |
| Floater | 3.70 % | 3.87 % | 31,036 | 17.60 | 4 | 0.0330 % | 2,614.8 |
| OpRet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0471 % | 3,125.4 |
| SplitShare | 4.70 % | 4.14 % | 68,071 | 3.49 | 5 | 0.0471 % | 3,732.4 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0471 % | 2,912.2 |
| Perpetual-Premium | 5.37 % | 4.77 % | 54,736 | 2.16 | 20 | 0.0571 % | 2,834.9 |
| Perpetual-Discount | 5.23 % | 5.30 % | 67,470 | 14.92 | 14 | -0.0735 % | 2,996.4 |
| FixedReset | 4.28 % | 4.34 % | 149,155 | 6.12 | 98 | 0.0267 % | 2,470.9 |
| Deemed-Retractible | 5.06 % | 5.35 % | 87,888 | 5.93 | 30 | -0.1541 % | 2,938.5 |
| FloatingReset | 2.76 % | 2.77 % | 38,226 | 3.90 | 8 | -0.1032 % | 2,680.2 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| PWF.PR.P | FixedReset | -1.37 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-12-13 Maturity Price : 17.23 Evaluated at bid price : 17.23 Bid-YTW : 4.55 % |
| TRP.PR.B | FixedReset | -1.32 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-12-13 Maturity Price : 15.75 Evaluated at bid price : 15.75 Bid-YTW : 4.51 % |
| TRP.PR.E | FixedReset | -1.26 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-12-13 Maturity Price : 22.38 Evaluated at bid price : 22.71 Bid-YTW : 4.47 % |
| TRP.PR.F | FloatingReset | -1.09 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-12-13 Maturity Price : 19.05 Evaluated at bid price : 19.05 Bid-YTW : 3.71 % |
| BMO.PR.Y | FixedReset | 1.20 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-12-13 Maturity Price : 23.25 Evaluated at bid price : 24.52 Bid-YTW : 4.32 % |
| CM.PR.O | FixedReset | 1.52 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-12-13 Maturity Price : 22.91 Evaluated at bid price : 23.31 Bid-YTW : 4.28 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| RY.PR.I | FixedReset | 521,608 | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.00 Bid-YTW : 3.63 % |
| BMO.PR.B | FixedReset | 130,352 | YTW SCENARIO Maturity Type : Call Maturity Date : 2022-02-25 Maturity Price : 25.00 Evaluated at bid price : 26.06 Bid-YTW : 3.83 % |
| RY.PR.R | FixedReset | 94,732 | YTW SCENARIO Maturity Type : Call Maturity Date : 2021-08-24 Maturity Price : 25.00 Evaluated at bid price : 26.93 Bid-YTW : 3.37 % |
| HSB.PR.C | Deemed-Retractible | 56,892 | YTW SCENARIO Maturity Type : Call Maturity Date : 2018-01-12 Maturity Price : 25.00 Evaluated at bid price : 25.29 Bid-YTW : 3.44 % |
| CM.PR.R | FixedReset | 39,685 | YTW SCENARIO Maturity Type : Call Maturity Date : 2022-07-31 Maturity Price : 25.00 Evaluated at bid price : 25.38 Bid-YTW : 4.19 % |
| HSB.PR.D | Deemed-Retractible | 30,738 | YTW SCENARIO Maturity Type : Call Maturity Date : 2018-01-12 Maturity Price : 25.00 Evaluated at bid price : 25.29 Bid-YTW : 3.09 % |
| There were 21 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| CU.PR.I | FixedReset | Quote: 25.45 – 25.95 Spot Rate : 0.5000 Average : 0.3220 YTW SCENARIO |
| MFC.PR.F | FixedReset | Quote: 17.80 – 18.22 Spot Rate : 0.4200 Average : 0.2716 YTW SCENARIO |
| TRP.PR.B | FixedReset | Quote: 15.75 – 16.12 Spot Rate : 0.3700 Average : 0.2568 YTW SCENARIO |
| TRP.PR.G | FixedReset | Quote: 23.90 – 24.29 Spot Rate : 0.3900 Average : 0.3051 YTW SCENARIO |
| BIP.PR.A | FixedReset | Quote: 24.23 – 24.46 Spot Rate : 0.2300 Average : 0.1454 YTW SCENARIO |
| SLF.PR.G | FixedReset | Quote: 18.25 – 18.49 Spot Rate : 0.2400 Average : 0.1666 YTW SCENARIO |