So far, so good. The Federal Reserve raised short-term interest rates off the floor for the first time in seven years on Dec. 16, and the sky didn't fall on financial markets.
Federal Reserve Chair Janet Yellen got high marks for delivering a clear message that emphasized the bank's still very accommodative policy stance, its sensitivity to global economic data and its flexibility on further rate hikes depending on the data.
"It's probably the most telegraphed move that the Fed has ever made," said Chris Gunster, managing director national fixed-income portfolio manager for U.S. Trust. Yellen's statement "was measured and guarded, and it was what the market wanted to hear," he added.
Compared to the last major shift in policy in 2013, when the Fed began reining in the quantitative easing bond-buying programs and caused the so-called taper tantrum in the markets, the Fed's first rate hike in almost a decade was gracefully executed.
"Yellen gets an A+ for the largest policy dismount in its history," said David Grecsek, director of investment strategy and research at registered investment advisor Aspiriant. "It's more symbolic than anything, but it gets us off the zero-rate policy."
The question now is: How far and how fast will the Fed's rate-hike cycle go? The bank's "dot plot," charting Fed members' expectations of future rates, suggests as many as four rate hikes in 2016 and a Fed funds rate of around 3 percent by 2018.
The bond market doesn't think so. The yield on the 10-year Treasury bond — 2.26 percent on Dec. 29 — has remained somewhat level since the Fed's move, and the market is pricing in only two rate hikes this year as a more likely scenario.
"It appears the Fed has a higher projected trajectory than the market does," said Gunster at U.S. Trust. "The difference will have to be worked out."
As for the possibility of a 3 percent risk-free rate by 2018, if the Fed sees its target inflation of 2 percent, experts think that's probably overly optimistic, too.
"I'd be surprised if there's enough momentum in growth and inflation to reach that level," said Rick Reider, chief investment officer of fixed income at BlackRock. "We expect the yield curve to flatten out and for the long end to move up only moderately from here."
Aspiriant's Grecsek also thinks the still uncertain outlook for the U.S. and global economies is likely to make this rate cycle an abbreviated one. "If U.S. economic fundamentals are strong enough to warrant a 3 percent Fed funds rate by 2018, that would be great, but we think it's more likely to top out between 1.5 percent and 2 percent," he said.