Fed Chair Yellen’s Swan Song

As was widely expected, the Federal Reserve (Fed) voted unanimously to leave monetary policy unchanged during its January 30–31 meeting. The fed funds target rate remains between 1.25% and 1.50%, and the Fed will continue to allow the roll-off of Treasuries and mortgage-backed securities from its balance sheet. “Though a rate hike was not expected, markets were certainly interested in any changes to the Fed’s language around inflation and growth expectations,” said John Lynch, Chief Investment Strategist. “That anticipation was warranted, as the Fed has become more decisive about the inflation pickup and more upbeat about growth expectations.”

The post-meeting statement included upgrades to the Fed’s economic assessments (here’s a side-by-side comparison of today’s statement versus the Fed’s statement released at the last meeting), noting that “gains in employment, household spending, and business fixed investment have been solid;” an improvement on more muted language from December, when only gains in employment were described as “solid.” In addition, the Fed took a more hawkish stance on inflation, stating that “inflation on a 12‑month basis is expected to move up this year.” There were no explicit economic projections released this meeting, but today’s Fed language may point to an upgrade in economic projections during its March meeting.

Importantly, this was Janet Yellen’s final meeting as chair; Jerome Powell will take the reins and head the U.S. central bank beginning February 3. Powell is widely expected to continue along the same path of gradual, data-dependent rate hikes laid out by his predecessor. However, Powell’s leadership may differ from Yellen’s in other ways (see our recent Bond Market Perspectives, “The Fed is Moving Forward” for more information).

Markets are anticipating a rate hike during the next Fed meeting on March 20–21, and currently pricing in between two to three rate hikes for all of 2018. This is in line with our expectations for the Fed. We believe economic growth will continue to strengthen and inflation will move higher, keeping the Fed on track to raise rates gradually throughout the year.



The economic forecasts set forth in the presentation may not develop as predicted.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.

Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.

All indexes are unmanaged and cannot be invested into directly.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond and bond mutual fund values and yields will decline as interest rates rise and bonds are subject to availability and change in price.

Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.

Mortgage-backed securities are subject to credit, default, prepayment risk that acts much like call risk when you get your principal back sooner than the stated maturity, extension risk, the opposite of prepayment risk, market and interest rate risk.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Securities and Advisory services offered through LPL Financial LLC, a Registered Investment Advisor


For Client Use — Tracking # 1-694545 (Exp. 01/19)