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

Wells Fargo Investment Institute – September 26, 2018

The Federal Open Market Committee (FOMC) decided to increase the range for the federal funds target rate by 0.25% today. The new target range is 2.00%-2.25%. 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) will increase its balance sheet reduction by $10 billion in October. The new monthly balance sheet reduction going forward will be $50 billion.

Download the Key Takeaways (PDF)

Stated Reasons

  • Job gains have been strong, while the unemployment rate has remained low. 
  • Household spending has increased, while business fixed investment continues to grow strongly.
  • Core inflation remains near 2%, and longer-term inflation expectations are little changed.

Looking Forward

  • Inflation (excluding food and energy prices) has moved to the Fed’s 2% objective. The committee expects inflation to run near its 2% symmetric target over the medium term.
  • The FOMC expects that further gradual increases in the federal funds rate will be consistent with sustained expansion of economic activity, strong labor-market conditions, and inflation near the 2% objective. 
  • Risks to the economic outlook appear roughly balanced.

What Else?

  • The Fed continued to describe the path of future rate hikes as “gradual.” The Fed’s newly released projections indicate that one additional rate hike this year is likely and that three additional rate hikes are likely next year. Our current outlook is for three additional rate hikes over the next 12 months. The Fed continued to describe the path of future rate hikes as “gradual.” The Fed’s newly released projections indicate that one additional rate hike this year is likely and that three additional rate hikes are likely next year. Our current outlook is for three additional rate hikes over the next 12 months. 
  • The vote was unanimous to increase the current fed funds target rate.
  • The phrase “monetary policy remains accommodative” has been removed, suggesting that the Fed views monetary policy as neither accommodative nor restrictive at current levels.The phrase “monetary policy remains accommodative” has been removed, suggesting that the Fed views monetary policy as neither accommodative nor restrictive at current levels.
  • We believe that investors should consider favoring the short part of the yield curve to mitigate interest-rate risk and to benefit from additional income potential as the Fed continues its current path of rate hikes.