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Yellen's Swan Song: Fed Keeps Interest Rates in 1.25%-1.5% Range

January 31, 2018

(Wednesday, Post-Fed Decision) Janet Yellen concluded her reign as the first chairwoman of the Federal Reserve Board and its Open Market Committee (FOMC) meeting today by holding interest rates unchanged in the same calm, composed manner in which she led the policymaking body for the last four years.

That likely did not surprise Fed rate watchers, given the 96% probability of that outcome as forecast by the CME FedWatch Tool, which uses Fed Fund futures prices to gauge the probability of an upcoming rate hike. The federal funds rate, which banks charge each other on overnight loans, stands in a 1.25%-1.5% range.

The closely-watched wording of the Fed statement was little changed, too, except for its view on inflation. “Market-based measures of inflation compensation have increased in recent months but remain low; survey-based measures of longer-term inflation expectations are little changed, on balance,” the statement said. By adding that “measures of inflation have increased in recent months,” the Fed might be signaling that more than three rate hikes could be on the table this year, some analysts said.

The statement “was slightly more hawkish,” Michael Farr, chief executive of Farr, Miller & Washington, an investment advisory firm, said on CNBC after the announcement. “They made enough room to go ahead and continue raising rates.”

In December, the Fed noted that it expects the benchmark rate to stand at 2.1% at the end of 2018, 2.7% by the end of 2019 and 3.1% in 2020. Rates are still widely considered accommodative, according to analysts.

The FedWatch tool jumped to an 82% probability of a rate hike in March after the announcement from the 75% stance it stood ahead of it. That two-day meeting starts March 20.   

The Fed said that it is still “supporting strong labor market conditions.” It also continued to note that “Near-term risks to the economic outlook appear roughly balanced, but the committee is monitoring inflation developments closely.” Many analysts were looking for an adjustment to the “roughly balanced” wording in that statement, which might have indicated that the Fed was thinking that inflation would rise.

“Gains in employment, household spending, and business fixed investment have been solid, and the unemployment rate has stayed low,” the statement said, altering wording slightly. “On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2%.”

Again left unchanged was that the Fed continues to believe that “economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.” (See below.)

Yellen’s 14-year tenure at the Fed ends this Saturday. Fed board member Jerome Powell will be sworn in as chairman on Feb. 5.

Meanwhile, the Markets Were….

The three major benchmarks fell from the opening highs to stay pretty steady throughout most of the pre-announcement trading period. But this time they moved to session lows with the S&P 500 falling into negative territory. Meanwhile, yields on Treasury notes moved higher.



The market’s major benchmarks, plotted here Wednesday, on the TD Ameritrade thinkorswim® platform, barely budged for the two hours ahead of the Fed announcement, which is typical. But the Dow Jones Industrials' ($DJI), shown as bars above, moved lower as did the Nasdaq Composite (COMP), in blue, while the S&P 500 (SPX), in purple, fell into negative territory. Data source: CME. For illustrative purposes only. Past performance does not guarantee future results.

About that Tax Cut: In December, Yellen noted at her press conference that the Fed expected a tax cut would fuel economic growth, but the tax bill was still in negotiations at the time. Since then, the $1.5 trillion tax cut has been signed into law, stocks have been reaching fresh records, consumers have been spending and President Trump said at last night’s State of the Union address that workers can expect to see more money in their paychecks in three weeks—all typical signs of economic growth.

Given all that, many analysts had expected the Fed to make note of the tax bill and the immediate impact it seems to have created. But, in keeping with Fed’s close-to-the-vest style of thinking, not a word was said.

On the Inflation Front: As noted here many times, inflation has been a stickler for Fed members. Today’s missive noted that inflation is expected to move up in the next 12 months, but not much more than that. That might be because the inflation picture is much the same today as it was in December. Core Personal Consumption Expenditures (PCE), the Fed’s go-to inflation measure, held steady at 1.5% in 2017. Core inflation, which strips out the volatile food and energy prices, rose 0.2% in December, the government reported Monday. But the overall core PCE rate is still well below the Fed’s 2% target.

Spending has been on the rise, as noted in Monday’s Commerce Department report, but wage growth hasn’t. Consumers dipped into savings to spend last month, dropping the overall savings rate to 2.4%, a 10-year low, according to the Commerce Department. 

And the Vote Count: Like the December meeting, the vote was widely expected to be unanimous—and, unlike then, it happened today for Yellen’s swan song. Dissension in the immediate past was typically tied to decisions to raise rates, not hold them.

The Fed starts the year on a united front. As a reminder, last year’s Yes-No score card was 5-3. Minneapolis Fed president Neel Kashkari voted no each time rates were hiked last year in March, June and December. Chicago Fed President Charles Evans joined the opposition side in December. However, neither of them get votes this year, due to the Fed’s rotational system. The two new voters are San Francisco Fed President John Williams and Cleveland Fed President Loretta Mester—both have previously expressed hawkish views on interest rates.

Good Trading,



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