The US Federal Reserve Remains Optimistic.

Let's Hope That they Are Correct!

The US Fed raised rates by 1/4% today, that was no surprise.

"The Committee judges that there has been considerable improvement in labor market conditions this year and it is reasonably confident that inflation will rise, over the medium term, to its 2 percent objective. Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2%. The stance of monetary policy remains accommodate after this increase, thereby supporting further improvement in labor market conditions and a return to 2% inflation."

And

"The committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate."

However, the graph of committee members projections (otherwise known as the "dot plot") reveals something a little different:

click on the graph to enlarge

In a nutshell, it appears that the majority of "dots" in 2016 fall near 1.5%. That would indicate 4 more expected 1/4% rate increases. 

Is that gradual?

It would suggest that expectations for US economic growth in 2016 would be rather robust.

The International Monetary Fund (IMF) forecast for US GDP growth in 2016 is 2.8%. Hardly robust.

Each time the Federal Reserve raises rates, they must drain liquidity from the markets. It has been that liquidity that has spurred equity market growth and has taken US equities into "nose bleed" territory. Well above what simple earnings metrics would consider average.

12 month forward price to earnings ratio = 16.1

10 year average = 14.2

As liquidity comes out of the system, equity prices will have to return to the average.

Just sayin'