Say Goodbye: Yellen Passes the Baton to Powell with Little Drama

by Liz Ann Sonders of Charles Schwab, 2/1/18

Key Points

  • The Fed kept rates unchanged as Yellen passed the baton to Powell.

  • The FOMC statement had minimal changes so no new signal was made on risks to the outlook.

  • But officials noted a pickup in inflation, which remains a factor in the increased volatility we expect this year.

The Fed surprised no one and kept short-term interest rates unchanged, at what was the final Federal Open Market Committee (FOMC) meeting under the tutelage of Chair Janet Yellen. “The committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate,” the FOMC statement noted—adding the word “further” two times to prior statement language. There were no dissents among the FOMC voting members.

The acknowledgment of stronger economic growth and higher inflation expectations likely supports rising expectations for at least three interest rate increases this year. “Inflation on a 12-month basis is expected to move up this year and to stabilize around the Committee’s 2 percent objective over the medium term,” the statement said. “Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.” In addition, the statement noted that “market based measures of inflation compensation have increased in recent months but remain low,” which was an adjustment from the December statement when it read that the measures simply “remain low.”

Yellen passes the baton to incoming Chair Jerome Powell, who supports the Fed’s “gradual” approach; and it’s a near-certainty at this point that the fed funds rate will be raised at the next FOMC meeting in March. Powell is expected to continue down the path of trying to keep the tight labor market from causing inflation to overheat without raising rates so far or so fast as to stifle the improvement in growth expected this year.

Although it was not addressed in the FOMC statement, there are several recent developments worth noting as it relates to the outlook for inflation (and in turn Fed policy). Since before the financial crisis the “output gap” moved into negative territory and stayed there until last year’s third quarter, when it finally moved back into positive territory—which means the economy is finally operating above its potential.