Over the last six months investors have been focused on the political landscape, particularly on President Trump and the incoming administration; however, the Fed recently came back in focus as they raised interest rates by 25 basis points this month after a sequence of strong economic data (particularly unemployment below 5% and inflation approaching 2%).

The latest rate hike, the second in the last three Fed meetings, was taken in stride by the market as stocks moved higher after the announcement. The positive reaction may be found in the way Janet Yellen (the Chairwoman of the Federal Reserve) and her colleagues have set expectations for what's to come the rest of this year.  Through the Fed's statement, dot-plot, and press-conference the Fed indicated that they might hike rates a total of 3 times in 2017 (including the latest hike) in-line with current market expectations. 

Many investors were anticipating a more aggressive forecast, therefore the Fed's carefully crafted language allows the market to prepare for a continuation of the slow and steady rate hike environment we've seen over the last year and a half.   Historically, we've seen positive market returns during slow and steady rate hikes, while sharp rate hikes have had a less positive impact on the stock market.  As such, investors appear to be optimistic that the Fed is able to raise rates and enter a tightening phase due to the strength of the economy and prospects of continued growth throughout the year.

As we move throughout 2017, investors could be surprised by the Fed if we see a sharp jump in inflation (perhaps seen in wage growth) which might lead the Fed to tweak their strategy and potentially tighten more quickly than the market expects.

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