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

Wells Fargo Investment Institute – January 30, 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 continue reducing Treasury security purchases by up to $30 billion per month and mortgage-backed-security purchases by up to $20 billion per month. The Fed left open the possibility of adjusting the balance sheet normalization plan in the future if it needs to respond to economic and financial developments.

Download the Key Takeaways (PDF)

Stated Reasons
  • Economic activity has been rising at a solid rate.
  • Job gains have been strong, while the unemployment rate has remained low.  
  • Household spending has continued to grow strongly, while business fixed investment growth moderated from its healthy growth earlier last year. 
  • Both core inflation—and inflation for other items, excluding food and energy— remain near 2%.
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.
  • 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 removed the “gradual” rate hike language and replaced it with a commitment to be “patient” in regard to future rate hikes. If financial and international developments have positive outcomes as we anticipate, the Fed will likely resume a gradual pace of rate increases. We currently expect a rate hike at midyear and another rate hike near the end of 2019.
  • We do not expect a Fed rate hike at the March 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—as we expect the Fed will make additional hikes this year after a near-term pause.