FOMC projections: net result is a rise in real short-term rates - Wells Fargo

Analysts from Wells Fargo, explained that with the current FOMC assessment, we are back to a position in the economy where the Federal Reserve can begin to normalize its balance sheet. They point out that the key story is the implied rise into positive real rates ahead.

Key Quotes: 

"FOMC officials are comfortable enough with the strength and sustainability of the U.S. economy to finally initiate a draw-down of the balance sheet to levels more consistent with normal economic conditions”

“As for inflation, the FOMC lowered its median expectation for both overall and PCE inflation a touch for 2018 and then held steady the pace of inflation for 2019 and 2020 at the 2 percent target. We differ. There is a clear structural break in inflation (both CPI and the PCE deflator) after 2008. Moreover, the recent weakness in inflation is not solely transitory.

“Finally, there is a persistent pattern in inflation that helps explain why it has taken so long for the inflation pace get back to 2 percent. Our core PCE inflation forecast is lower than the FOMC’s for 2018 to reflect the long drawn out pattern of inflation adjustments.”

“An updated FOMC policy statement and the economic projections indicate a steady rise in the funds rate and, given the steady FOMC projections for inflation, the net result is a steady rise in the real short-term fed funds rate. This rise in real rates will represent a significant shift given that the majority of this economic and financial recovery has occurred in an environment of negative real rates.”

“The updated dots for 2017 do not take a December rate hike off the table. However, the dots do imply there is one less FOMC move in 2019. Interesting to note that the fed funds rate for 2020 at 2.9 percent is actually higher than the long-run 2.8 percent.”