Fed’s decision to hike rates in December 2018 was inconsistent – Wells Fargo

In December, the Federal Reserve rose the Fed Funds rate by 25bp. It was the last hike, at least until tomorrow. According to analysts at Wells Fargo, the mentioned hike seems to have been overly restrictive.

Key Quotes:  

“The SEP (Summary of Economics Projections) released in December 2017 forecast GDP to rise 2.5% in 2018 after rising 2.1% in 2017, inflation to remain flat at 1.9% and the fed funds rate to rise to 2.1% (median estimate) from 1.4%. The Fed’s restrictive monetary policy in 2018 may have been justified by the relatively stronger growth forecasts. Meanwhile, the SEP released in December 2018 forecast softer GDP growth and steady inflation, at 1.9%, but estimated the fed funds rate would rise to 2.9% from 2.1%. In theory, the rising fed funds forecast is inconsistent with muted inflation, which never hit the Fed’s 2% target, and lower GDP growth forecasts. Therefore, our analysis suggests that the December 2018 rate hike may have been overly restrictive and inconsistent given the FOMC’s economic and fed funds rate projections for 2019.”

“In late 2018, the FOMC suggested that the economy was moving more consistently with the Fed’s dual mandate objectives, decreasing downside risk. Thus the FOMC’s decision to adopt a “patient” stance in early 2019 did not come as a surprise to most market participants. In light of headline and core inflation slipping in the first quarter, the FOMC’s pivot to a “patient” stance was justified. In our view, the Fed’s decision to hike rates in December 2018 was inconsistent and seems to have been overly restrictive given the SEP for 2019 suggested a gradual slowdown in growth.”