FOMC Meeting: Key Takeaways

Wells Fargo Investment Institute shares its key takeaways from the Federal Reserve’s decision to raise interest rates.

FOMC Meeting: Key Takeaways

June FOMC Meeting | June 13, 2018

Policy Announcement

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.

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%

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.

Upcoming Meeting ScheduleAugust 1 | September 26* | November 8 | December 19*

* Indicates press conference occurring as well.

Risk Considerations

Investments in fixed-income securities are subject to interest rate, credit/default, liquidity, inflation and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price. Credit risk is the risk that an issuer will default on payments of interest and principal. This risk is higher when investing in high yield bonds, also known as junk bonds, which have lower ratings and are subject to greater volatility. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.

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