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Wells Fargo Investment Institute projects fed funds rate to end 2017 at 1%-1.25%

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Wells Fargo Investment Institute projects fed funds rate to end 2017 at 1%-1.25%

Wells Fargo Investment Institute expects the Federal Reserve to raise rates gradually in 2017.

For 2017 year-end, the firm expects a U.S. GDP growth rate of 2.1%, a U.S. inflation rate of 2.2%, a U.S. unemployment rate of 4.5% and a federal funds rate of between 1.00% and 1.25%.

It projects the S&P 500 index to close 2017 between 2230 and 2330. And in terms of oil price, Wells Fargo Investment Institute is forecasting West Texas Intermediate crude per barrel to finish next year in the range of $40 and $50. The firm also does not expect commodity prices to significantly rebound in 2017, even though the prices bottomed in 2016.

The firm thinks that going into 2017, investors should be attentive about these things: It believes that job gains and a strong U.S. housing market are supporting household spending, which can lead to modest economic and earnings growth in 2017. In addition, the firm noted that though inflation is still low, it is normalizing. It believes that normalized inflation rate is a positive sign; however, if inflation continues to rise through 2017, it might "cap equity valuations" and lead to more volatility in fixed-income markets.

The firm also thinks that higher inflation might also affect the Fed rate hikes. "Our view is that the Fed will tread cautiously and may allow inflation to run above its target to promote economic growth," it noted.

Furthermore, Wells Fargo expects the U.S. economy to grow modestly because of caution surrounding household and business. The firm thinks the Fed will continue to increase interest rates gradually in 2017, and it does not expect any new fiscal spending plans to affect the Fed's stance or the U.S. economy substantially in 2017. It thinks that investors should concentrate more on the "gradual path of rate hikes," instead of the particular months when the the U.S. central bank can raise rates.