Fed to raise rates in December and two more times in 2018 - Wells Fargo

Analysts from Wells Fargo,  expect the Federal Reserve to raise rates in December, and just two more times in 2018. At the same time they affirm that a pattern of over-forecasting the fed funds rate has become apparent in this business cycle. 

Key Quotes: 

“Attempting to predict future increases in the federal funds rate has proven to be a challenge for decision makers from both the public and private sides during this business cycle. A pattern of over-forecasting the fed funds rate has become apparent. Likewise, and somewhat unsurprisingly, this trend of over-shooting is also associated with predicting the future value of the 10-year Treasury, as its value is influenced by federal funds rate expectations.”

“Stubbornly low inflation and muted GDP  growth have likely slowed the pace of rate hikes.”

“Unorthodox monetary policy measures likely influenced the Fed to proceed with caution.”

“Another potential factor behind the slower pace of rate hikes is the historically large size of the Fed’s balance sheet. In hindsight, it is apparent that caution was required by the Fed as it sought to reduce its balance sheet while simultaneously hiking rates.”

“Most of these factors continue to occupy space in today’s economic environment. Thus, we largely expect the FOMC to proceed along their policy tightening path, albeit at a more cautious and restrained pace. A clear disconnect in predicting the fed funds rate exists between the market consensus, as measured by fed funds futures, and the Fed’s dot plot, which represents the FOMC members’ beliefs of where the fed funds rate should be at the end of a given year. While the market consensus has historically been a better gauge of the actual rate in the future, both forecasts tend to overshoot the actual fed funds figure. As of now, we expect the Fed to raise rates in December, and just two more times in 2018.”