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

Wells Fargo Investment Institute – August 1, 2018

The Federal Open Market Committee (FOMC) decided to leave the range for the federal funds target rate unchanged at 1.75% - 2.00% 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) will continue reducing its balance sheet by $40 billion this month and over the near future.

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.

Look

  • Inflation (excluding food and energy prices) has moved to a level close 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 projections released in June indicated that two additional rate hikes this year are likely (with a total of four rate hikes in 2018). Our current outlook is for one more rate hike in 2018 (for a total of three rate hikes this year).
  • The vote was unanimous to maintain the current fed funds target rate.
  • Market expectations of future rate-hike probabilities for September increased slightly on the announcement. They suggest that a September rate hike at this time is fairly likely (with a probability of more than 90%).  
  • 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 as the Fed continues its current path of rate hikes.