Fed’s Comments
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal.
My Interpretation:
The Fed’s objective is to achieve maximum employment and 2 percent inflation as measured by the personal consumption expenditures index (“PCE”). The Fed projects PCE inflation of 1.9 percent, 2.0 percent and 2.1 percent in 2018, 2019 and 2020, respectively. PCE was 1.7 percent last year and has not met or exceeded 2.0 percent since Janet Yellen was the Fed Chairwoman. With trillions in monetary stimulus over the past decade and the recent GOP tax cuts, it is possible the Fed’s projections could become reality. As of now, the Fed appears ready to be preemptive rather than waiting to see the whites of inflation’s eyes.
Conclusion
The combination of rate hikes and the Fed’s balance sheet unwind could cause volatility for financial markets. Investors should avoid stocks until the dust settles on future Fed actions.
