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

Wells Fargo Investment Institute – June 13, 2018

The Federal Open Market Committee (FOMC) decided to increase the range for the federal funds target rate from 1.50% - 1.75% to 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 $30 billion this month and plans to increase its monthly reduction to $40 billion next month.

Download the Key Takeaways (PDF)

Stated Reasons

  • The labor market has continued to strengthen, and economic activity has been rising at a solid rate.
  • Job gains have been strong, while the unemployment rate has remained low. Household spending has increased, while business fixed investment continues to grow strongly.
  • Longer-term inflation expectations are little changed (on balance).

Looking Forward

  • 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 rate increases 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 released projections indicated that two additional rate hikes this year are likely (with a total of four rate hikes in 2018). Our outlook is for one more rate hike in 2018 (for a total of three rate hikes this year).
  • The vote was unanimous to raise the fed funds target rate.
  • Market expectations of future rate-hike probabilities for August and September were little changed on the announcement. They suggest that an August rate hike is unlikely, but the September rate hike probability increased to more than 60%.
  • Market expectations of future rate-hike probabilities for June were little changed on the announcement and suggest a June rate hike is likely.  It is our expectation that the Fed will hike rates in June.
  • We believe that investors should consider favoring the short part of the yield curve to reduce interest-rate risk and to benefit from additional income as the Fed continues its current path of rate hikes.