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Federal Reserve could consider a wait-and-see period appropriate  - Wells Fargo

According to analysts from Wells Fargo, the risks are skewed to a longer pause at the Federal Reserve in the first half of 2019 than what they thought just a month ago. They see that tighter financial conditions suggest the FOMC may find a wait-and-see period appropriate.

Key Quotes: 

“Financial conditions have tightened in recent months, prompting speculation that the Federal Open Market Committee (FOMC) may need to alter its current expectation of raising the fed funds rate two more times this year. The Chicago Fed’s National Financial Conditions Index (NFCI) increased 13 bps between the FOMC’s September and December meetings—the largest increase between FOMC rate hikes since 2000—implying that overall financial conditions have tightened. Yet financial conditions are easier today than when the FOMC began raising rates in December 2015.”

“It is not unusual to see financial conditions ease while the FOMC is tightening policy—both are responding to the stronger economy. Controlling for the macroeconomic environment, however, shows that financial conditions have tightened more than the NFCI implies, and are tighter in total than when the FOMC first raised rates in late 2015.”

“While financial conditions do not seem overly restrictive at present, the FOMC may decide that a wait-and-see period may be appropriate given the speed of recent tightening in financial conditions and current expectations for growth to slow toward its longer-run trend.”

“Our most recent forecast, which was compiled in early December, looks for two 25 bps rate hikes in 2019, first in March and again in September. But we readily acknowledge that the risks are skewed to a longer pause in the first half of the year than we thought just a month ago. Overall financial conditions do not appear to be overly restrictive at present, but they clearly have tightened in recent weeks. Consequently, the FOMC may decide that a period of wait-and-see is again appropriate, especially with the fed funds target rate already close to many committee members’ estimates of “neutral” and with inflation showing few signs of significantly exceeding the Fed’s target of 2%.”

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