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.