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

Wells Fargo Investment Institute – December 14, 2022

Policy announcement

The Federal Open Market Committee (FOMC) increased the federal funds rate by .50% (50 basis points ((100 basis points equals 1%)) to 4.25% – 4.50%, effectively slowing down from the 0.75% increase experienced in the June, July, September, and November meetings. This is the highest the federal funds rate has been in 15 years. However, the FOMC still expects ongoing increases to the federal funds rate and to continue reducing its holdings of Treasury securities, agency debt, and agency mortgage-backed securities in 2023 in accordance with its statement released last May.

Download the Key Takeaways (PDF)

Stated reasons

  • Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low.
  • Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.

Looking forward

  • The FOMC anticipates that ongoing increases in the rate target range should be appropriate and that they expect inflation to return to 2% over time.
  • The FOMC is taking into account the cumulative tightening of monetary policy, the lags with which monetary policy may affect economic activity and inflation, and economic and financial developments. This is an acknowledgement that the Federal Reserve (Fed) may consider slowing the pace of future rate hikes to better assess the impact on the economy from the actions it has already taken.
  • In the past five Fed tightening cycles since 1990, long-term U.S. Treasury yields have peaked before the end of the tightening cycle but did not begin a clear declining trend until the tightening cycle was over. We acknowledge that although the current Fed tightening cycle may still not be over, we believe long-term rates are close to reaching their cycle peaks.

What else?

  • The median FOMC projection for the terminal federal funds rate during this cycle is now 5.1%, above 5% for the first time. This is above the longer-term neutral rate expectation of 2.5%. The new terminal rate expectation assumes several 25- or 50-basis-point rate hikes in the first half of 2023.
  • Investors may want to consider locking in a portion of their fixed-income portfolios at current yield levels, effectively implementing a barbell strategy by investing into the long and short end of the curve.

Upcoming meeting schedule

February 1 | March 22* | May 3 | June 14*

*Indicates the meeting is associated with a summary of economic projections. In addition, every meeting will be accompanied by a press conference.