United States: Fed stands pat in Yellen’s last meeting as Chair
The Federal Reserve’s Open Market Committee (FOMC) kept the target range for the federal funds rate unchanged at between 1.25% and 1.50% in its first meeting of the year, held on 30–31 January. The move, which was widely expected by market participants, was accompanied by a statement that struck a slightly more hawkish tone, adding emphasis on the tightening path ahead and upgrading officials’ assessments of inflation and growth prospects.
The communiqué painted a brighter picture of recent economic developments, stating that “gains in employment, household spending and business fixed investment have been solid”. In addition, the Bank continued to emphasize tightness in the labor market, noting that the “unemployment rate stayed low”. The statement dropped any reference to hurricane-induced disruptions in the data, a move consistent with most incoming data which now lacks major weather-linked distortions.
On the inflation front, officials appeared to acknowledge slightly stronger price pressures. The FOMC statement mentioned that, while core inflation continued to run below the 2.0% target on a 12-month basis, market-based measures of inflation, while also still low, had recently increased. Similarly, the Fed changed the language on the inflation outlook from “remain below 2 percent in the near term” to “move up this year”, likely reflecting higher crude oil prices and a base effect in March caused by a sharp decline in wireless telephone service prices in March of last year.
The most notable change, however, involved the paragraph on forward guidance. The statement added the word “further” to its description of the expected policy path, stressing that, “The Committee expects the economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate”. The subtle, but conspicuously hawkish, change suggests that the Fed is preparing to raise rates at its next meeting in mid-March barring any economic data pointing to a severe slowdown.
The addition of the word also reflected the FOMC’s intention to emphasize the durability of the hiking cycle beyond this year, hinting to a larger overshoot of the policy rate from its neutral level compared with the Fed’s December projections. This is consistent with the outlook for fiscal stimulus, which could require of a tighter monetary stance to prevent a build-up in inflationary pressures.
This was Janet Yellen’s last meeting as the Chair of the Federal Reserve. Monetary policy is unlikely to diverge substantially going forward, as market analysts largely believe Jerome Powell, the incoming Fed Chair, is of a similar mindset to his predecessor and is thus unlikely to deviate from the path set by Yellen. Despite Yellen’s accomplishments, Powell’s appointment to the position comes at a critical juncture, as the Federal Reserve attempts to balance a tight labor market and gradually mounting inflationary pressures with incoming fiscal stimulus.