Rates on hold after Yellen’s final FOMC meeting

The Federal Open Market Committee (FOMC) achieved consensus as it held rates on January 31, in its last meeting under the chairmanship of Janet Yellen.

The committee’s composition has changed with the annual rotation of regional Federal Reserve presidents – the departure of Neel Kashkari and Charles Evans, both dissenters in December 2017, helped the committee achieve unanimity in its vote this time around. Rates remain on hold at 1.25–1.5%, and the gradual process of rolling assets off the balance sheet continues.

The committee’s statement was little changed from a month earlier, but showed some marginal signs of increased optimism. The economic impact of the hurricanes that hit the US over the summer has passed from the FOMC’s view, and it now expects inflation to “move up this year and stabilise around the committee’s 2% objective over the medium term”.

The Fed’s preferred personal consumption expenditure index measure of inflation has wavered just below 2% in recent months, slipping to 1.7% in December 2017 from 1.8% in November. However, economists at the Fed and in the private sector expect factors dragging on inflation to fade this year and a weaker dollar to help push prices higher.

On January 31, the FOMC noted the broader strength of the economy: “Gains in employment, household spending and business fixed investment have been solid, and the unemployment rate has stayed low.” Committee members also hinted at their continued commitment to “gradual increases” in rates this year.

The meeting is the last of Yellen’s tenure as US Federal Reserve Board chair, with Jerome Powell set to take over from her next week. She has overseen four successful years for the US economy, and implemented a process of gradual tightening that has so far avoided rattling markets.

Year-on-year real GDP growth has been above 1% in every quarter of her term, peaking at 3.8% in the first quarter of 2015. At the same time, unemployment has fallen to record lows, and inflation returned almost to target, never quite turning negative, despite a sharp plunge in the wake of 2014’s oil shocks.

The process of balance-sheet normalisation is steadily gathering steam. From a peak of $4.47 trillion in October 2017, the Fed’s total assets are now $4.44 trillion, and the asset roll-off will accelerate in the coming months. Markets remain calm, in contrast to the ‘taper tantrum’ under Ben Bernanke in 2013.

US economists paid tribute to Yellen’s achievements. “Janet Yellen’s legacy at the Federal Reserve: lower unemployment, much more confidence in the financial markets and closer to target inflation than in the economy she inherited,” said Harvard professor Larry Summers in a tweet on January 31. “What more could one want from a Fed chair?”