FOMC Sees “Solid” Economic Activity, Expects Rate Hikes to Remain “Gradual”
by Craig Dismuke, Dudley Carter
The Federal Reserve voted unanimously to leave its target rate range unchanged at 1.25-1.50% in Janet Yellen’s final meeting as Chairwoman. The Official Statement reflected an improved assessment of economic activity. The characterization of household spending was changed from “expanding at a moderate rate” to having been “solid”. Likewise, the characterization of business fixed investment was changed from having “picked up in recent quarters” to having been “solid”. The unemployment rate was described previously as declining but is now described as being “low”.
The Statement reads almost as a victory lap for Chairwoman Yellen, with the economy meeting the objectives of the Fed with one exception – inflation. However, even the description of inflation was improved. The December Statement noted that inflation was expected to “remain somewhat below 2 percent in the near term” before stabilizing around 2 percent in the medium term. The January Statement notes that inflation is now expected to “move up this year,” stabilizing around 2 percent in the medium term.
Going forward, the Committee continues to expect to raise rates at a “gradual” pace.
Given the strong assessment of economic activity and confidence that the stabilization of inflation is near, the Statement could be seen as slightly hawkish. However, that is to be expected given the recent performance of the economy and the financial markets. Inflation will continue to be the key to how fast the Fed can hike.
Fed Governor Jay Powell is scheduled to be sworn in as the new Chairman on February 5. He is not expected to materially alter the posture of the FOMC, but to continue down the path charted by Chairwoman Yellen. She inherited a target rate range of 0.00-0.25% when she took over in February 2014. She has since presided over the first Fed rate hike in ten years, five total rate hikes, with three of those coming in 2017. She oversaw the end of quantitative easing and the beginning of the Fed’s balance sheet normalization process.
FOMC Official Statement
January 31, 2018
Information received since the Federal Open Market Committee met in December indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. Gains in employment, household spending, and business fixed investment have been solid, and the unemployment rate has stayed low. On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2 percent. 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.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong. Inflation on a 12‑month basis is expected to move up this year and to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.
In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1-1/4 to 1‑1/2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant further 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. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
Voting for the FOMC monetary policy action were Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Loretta J. Mester; Jerome H. Powell; Randal K. Quarles; and John C. Williams.