Fed Leaves Rates Steady in Yellen’s Last Meeting as Chair

As widely expected, the Federal Open Market Committee (FOMC) held the target range for the federal funds rate unchanged between 1-1/4 and 1-1/2 percent.

The Fed’s views appear little changed from the mid-December meeting round, with only minor wording changes in the policy statement.

The economy was seen as having improved, having posted “gains” in employment, spending, and business investment. Moreover, the unemployment rate was seen as remaining “low.” References to fluctuations related to hurricane activity were taken out of the statement.

While overall inflation was believed to continued to run “below 2 percent,” the statement outlined the FOMC’s expectation that inflation will “move up this year.” Moreover, the Fed also acknowledged the improvement in expectations, stating that market-based measures “increased in recent months” while still warning that they “remain low.”

As before, the Fed telegraphed future adjustments to the stance of monetary policy. However, the word “further,” was added with the FOMC now expecting that “further gradual increases in the federal funds rate” are warranted.

After the double-dissent in December, the status-quo decision and the slightly more hawkish statement was embraced by all the voting members. It is worth noting that the voting membership has changes slightly this year with the exit of the Federal Bank Presidents of Chicago, Dallas, Minneapolis, and Philadelphia, with their places taken over by Presidents from Atlanta, Cleveland, Richmond, and San Francisco. While the Atlanta and Richmond Presidents are newcomers, with their views little publicized so far, the exit of the typically-dovish Minneapolis and Chicago and entry of the typically-hawkish Cleveland has tilted the FOMC slightly to the hawkish side.

Key Implications

This statement was largely of a vanilla-variety, acknowledging the improvement in the economy and inflation expectations in recent weeks, with the only surprise being the addition of the word “further” in front of “gradual increases.” On the face of it, this addition suggest that the Fed is preparing to raise rates at its next meeting in mid-March and wants the markets to be ready. This is unlikely to cause much volatility, with the March hike already largely priced in.

This was Chair Yellen’s last meeting at the helm of the Federal Reserve. While her Chairmanship lacked significant new policy initiatives, her steady hand at the helm and cool execution of the balance sheet wind down deserves praise. Moreover, the important legacies that she leaves the Fed with are twofold. For one, she has convinced the remainder of the FOMC that the unemployment rate is in and of itself not a perfect measure of labor market slack, with her focus on other forms of underemployment particularly helpful. Secondly, she has managed to change the mind of many of her colleagues as far as the neutral rate, which has come down steadily from near 4% at the beginning of her tenure to about 2.75% at its end. These are both important concepts, which together have led to better policy during her tenure – allowing the economy to improve further given the very gradual rate hikes.

Policy is unlikely to diverge substantially going forward despite Chair Yellen’s exit. Chair Powell, who takes over on Saturday, appears to be of a similar mindset to his predecessor and is unlikely to diverge from the gradual path set forth by the Yellen Fed. However, his appointment comes at a critical juncture for the Fed, as it faces a tight labor market coupled with stimulus coming from fiscal policy. It will not be an easy job and we wish him all the best.