Yellen's final Fed meeting
Next week’s FOMC meeting (Jan 31) will be the last chaired by Janet Yellen with Jerome Powell taking the reins of the Federal Reserve from February 3. Given the Fed only hiked rates in December and that this meeting won’t be accompanied by a forecast update pack or press conference – we only get the press-release – it is going to be a non-event. Even the press release is likely to be fairly anodyne so as not to constrain Powell ahead of his first FOMC meeting as Chair in March.
More work for Powell
Yellen’s Fed hiked rates three times last year and we suspect that the Fed will be just as busy this year under Powell. The economy is strong, with domestic tax cuts and upward revisions to global growth offering additional support in 2018. Price pressures are also likely to increase in coming months as higher commodity prices, dollar softness, cell phone data charges and rising wage pressures conspire to push up inflation, possibly to 3% by the summer.
The Fed also continues to talk about loose financial conditions – namely the flat yield curve and dollar softness – implying that they perhaps have more work to do at the short-end to make monetary conditions more optimal. We also hear lots of commentary about financial stability risks from over indebtedness, which hints at earlier (but more modest) moves on interest rates. Then there is the changing composition of voters within the FOMC due to the annual rotation. Due to the number of officials involved, not everyone votes at each meeting and the two most dovish voters from 2017 (Neel Kashkari and Charles Evans) will not be voting in Jerome Powell’s committee. They are being replaced by two relative hawks in John Williams and Loretta Mester.
Having said that, we are currently forecasting no rate hike in 1Q18. Near-term activity data may be somewhat soft given bad weather in January and core inflation is likely to remain below 2% through to April. As such, incoming Federal Reserve Chair Jay Powell may choose to wait until the outlook is clearer before triggering consecutive hikes in Q2, Q3 and Q4. However, the risks to our three-hike view for 2018 are biased to the upside and should the activity data remain firm, we will need to insert a further Fed rate rise into our forecasts for the March FOMC meeting.
The % increase in the S&P 500 since Janet Yellen took over as Fed Chair in February 2014
Yellen is a tough act to follow
Turning back to Janet Yellen, we think she can look back on her tenure as Fed Chair with pride. The US economy is growing at a 3% rate, inflation is heading towards its 2% target, unemployment is at 17-year low, and the Fed has moved interest rates away from the zero lower bound following five 25bp hikes and is also now starting to shrink its massive balance sheet. The financial system is also stronger while stock markets are at record highs. This is going to be a tough benchmark for Jerome Powell to beat.