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The Fed’s Decision and What It May Mean for Investors

Wells Fargo Investment Institute – March 21, 2018

The Federal Open Market Committee (FOMC) decided to increase the range for the federal funds target rate to 1.50% to 1.75% today. The FOMC reiterated that it expects economic conditions to evolve in a manner that will warrant gradual increases in the federal funds rate. The Federal Reserve (Fed) also will increase its monthly balance-sheet reduction targets beginning in April. The new monthly roll-off target is $18 billion in Treasury securities and $12 billion in mortgage-backed-securities— up from $12 billion and $8 billion, respectively.

Download the Key Takeaways (PDF)

Stated Reasons

  • The labor market has continued to strengthen, and economic activity has been rising at a moderate rate. This is a downgrade from the last meeting, at which the Fed stated that economic activity was increasing at a solid pace.
  • Job gains have been strong, and household and business spending have moderated, while the unemployment rate has remained low.
  • Market-based measures of inflation have increased in recent months, but they remain low, while survey-based measures of inflation are little changed.

Looking Forward

  • Inflation (excluding food and energy prices) is expected to increase this year and stabilize around the committee’s 2% objective over the medium term.
  • The FOMC continues to expect that the U.S. economy will expand at a moderate pace and that labor-market conditions will remain strong. 
  • Near-term risks to the economic outlook appear roughly balanced, but the committee is monitoring inflation development closely.

What Else?

  • The Fed continued to describe the path of future rate hikes as “gradual.”  The Fed’s economic projections indicate that two additional rate hikes this year are likely (with a total of three 2018 rate hikes).  Our outlook also is for two more rate hikes in 2018 (in addition to the rate hike announced today).
  • The Fed will continue reducing the size of its balance sheet. This reduction was increased to $30 billion per month. We would expect the Fed to increase this amount by $10 billion in July if conditions warrant.
  • The vote was unanimous to increase the fed funds rate target range by 25 basis points.
  • Market expectations of future rate-hike probabilities for June were little changed. 
  • The FOMC decision today was widely expected and had a relatively minor initial impact on the markets.