Fed: A new hike and changes to the forward guidance – Wells Fargo

The FOMC decided today to raise rates by 25bp as expected. Analysts at Wells Fargo, point out that the Fed added a fourth rate hike this year while upgraded its outlook for
GDP and inflation. They noted that the US central dropped guidance that the rate will stay below the long term rate for a while.

Key Quotes:

“For the FOMC, the decline in the unemployment rate below 4 percent signals future upward pressure on inflation, therefore supporting continued fed funds rate increases. But how many? In the current economic expansion, the decline in the unemployment rate has not been matched by an anticipated increase in measured inflation. The simple unemployment-inflation link has been broken by changes in demographics (declining labor force participation rates) and the globalization of the labor market.”

“For now, the spread between the benchmark 30-year and 10-year Treasury yields reinforce the belief that markets are okay with FOMC actions. However, there is a risk that the longer the FOMC tolerates above-target inflation, the more likely that markets will believe that the FOMC will have the courage to rein in inflation sometime in the future.”

“For the FOMC, the way ahead for the funds rate is clear, with steady rate increases in 2018, 2019 and 2020. We are skeptical. Our outlook is that the FOMC has given us a very linear projection in the fed funds rate through 2020, while also pursuing shrinkage in its balance sheet. Given the recent increases in auto and credit card delinquency rates, there is evidence of growing financial strains on mid-to-lower-credit households that may weaken overall economic growth into 2020. Linear projections in a cyclical economy do not raise our level of confidence.”