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

Wells Fargo Investment Institute – March 20, 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 will be patient when evaluating future increases in the federal funds rate. The Federal Reserve (Fed) will reduce balance sheet redemptions of Treasury securities beginning in May by $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

  • Economic activity has slowed from its solid growth rate in the fourth quarter.
  • Job gains have been strong, while the unemployment rate has remained low.
  • Recent indicators suggest slower growth of household spending and business fixed investment.
  • Overall, inflation has declined; inflation for other items, excluding food and energy, remains near 2%.
Looking Forward

  • Inflation (excluding food and energy prices) is near the Fed’s 2% objective. The committee expects inflation to run near its 2% symmetric target over the medium term.
  • Recent global economic and financial developments, along with muted inflation pressures, should allow the Fed to be “patient” with future adjustments to the federal funds target range.
  • Timing of future federal funds rate changes will take into account labor market conditions, indicators of inflation pressures and expectations, and financial and international developments.

What Else?

  • The committee will begin reducing its balance sheet runoff in May—and will end the balance sheet reduction at the end of September 2019.
  • The new “dot plots” suggest that the Fed will not hike rates in 2019. We continue to forecast a rate hike in the second half of this year, but we are reevaluating our forecasts in light of the Fed’s announcement.
  • We do not expect a Fed rate hike at the May meeting.
  • The vote was unanimous to leave the fed funds rate unchanged.
  • We believe that investors should consider favoring the short part of the yield curve to help mitigate interest-rate risk and to benefit from additional income potential. We are looking for a market opportunity to extend portfolio duration.