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

Wells Fargo Investment Institute – June 19, 2019

The Federal Open Market Committee (FOMC) decided to maintain the current target range for the federal funds rate at 2.25%-2.50%. The FOMC removed the word “patient” from its statement and noted that “uncertainties” have increased in the economic outlook. The Federal Reserve (Fed) will continue reducing its balance sheet through redemptions of Treasury securities of $15 billion per month—while continuing to redeem mortgage-backed security purchases by up to $20 billion per month. The committee intends to conclude its balance sheet runoff at the end of September 2019.

Download the Key Takeaways (PDF)

Stated Reasons

  • Labor market activity remains strong, and economic activity is rising at a moderate rate.
  • Job gains have been solid, while the unemployment rate has remained low.
  • Indicators suggest that growth of household spending has picked up from earlier this year, while business fixed investment remains soft.
  • Both overall inflation—and core inflation, excluding food and energy—have declined. Currently, both are below the Fed’s long-term target of 2%.  

Looking Forward

  • The committee expects inflation to run near its 2% target over the medium term.
  • Current global economic and financial uncertainties, along with muted inflation pressures, imply that incoming economic data will impact the outlook for any future adjustments to the target range for the federal funds rate.
  • Timing of future federal funds rate changes will reflect labor market conditions; indicators of inflation pressures and expectations; and financial and international developments. The Fed will act appropriately to sustain the expansion.

What Else?

  • The “dot plots” suggest a disagreement among Fed members—with eight members submitting a projection for at least one rate cut this year and nine members submitting a projection that leaves rates unchanged or higher by year-end.
  • The median “dot plot” forecast remains unchanged with no Fed rate cut forecasted. We forecast one fed funds rate cut by year-end.
  • We favor a more balanced approach to the yield curve and duration (a measure of interest-rate risk). We are neutral on duration and believe that investors should position duration near that of their individually selected benchmarks. Although we favor the short end of the yield curve, given its flatness—we have moved to a neutral (or benchmark) weight on the intermediate and long parts of the curve.
  • After the meeting, the probability of a July 31, Fed rate cut rose slightly according to the fed fund futures market, rising from an 80% probability to a 94% probability.
  • James Bullard voted against the monetary policy action, instead favoring to lower the federal funds rate by 25 basis points. (100 basis points equals 1%)