Janet Yellen’s Fed Era Ends With Unanimous Vote of No Rate Hike


Federal Reserve officials, meeting for the last time under Chair Janet Yellen, left borrowing costs unchanged while adding emphasis to their plan for more hikes, setting the stage for an increase in March under her successor Jerome Powell.

“The committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate,” the policy-setting Federal Open Market Committee said in a statement Wednesday in Washington, adding the word “further” twice to previous language.

The changes to the statement, collectively acknowledging stronger growth and more confidence that inflation will rise to their 2 percent target, may spur speculation that the Fed will pick up the pace of interest-rate increases. Officials also said inflation “is expected to move up this year and to stabilize” around the goal, in phrasing that marked an upgrade from their statement in December.

At the same time, the Fed repeated language saying that “near-term risks to the economic outlook appear roughly balanced.”

“It opens the door to four hikes for them, but I don’t think they have walked through it,” said Michael Gapen, chief U.S. economist at Barclays Plc in New York. “It closes the door to two hikes.” Fed officials penciled in three rate moves this year in quarterly forecasts they updated last month, according to their median projection.

With her term ending later this week after President Donald Trump chose to replace her, Yellen is handing the reins to Powell, who has backed her gradual approach and is widely expected to raise interest rates at the FOMC’s next meeting for the sixth time since late 2015. Fed officials are hoping to keep a tight labor market from overheating without raising borrowing costs so fast that it would stifle the economy.

“Gains in employment, household spending and business fixed investment have been solid, and the unemployment rate has stayed low,” the Fed said, removing previous references to disruptions from hurricanes. “Market-based measures of inflation compensation have increased in recent months but remain low.”

With a gradual pace of rate increases, policy makers want to nudge inflation back up to their 2 percent target, a goal they have mostly missed for more than five years. Even with a brightening outlook for global growth and Fed tightening, financial conditions continue to ease.

What Our Economists Say

The FOMC is more confident in the inflation outlook, but is not looking to deviate from its gradual path of policy normalization. The economic assessment acknowledged straightforward improvements in economic conditions, but the tone in no way hints of concerns about the economy overheating. 

The Fed is on track to raise rates in March. 

— Carl Riccadonna and Yelena Shulyatyeva, Bloomberg Economics

The vote by U.S. central bankers to keep the benchmark overnight lending rate in a 1.25 percent to 1.5 percent target range was unanimous. Fed officials also voted to continue with their program to reduce the central bank’s balance sheet, which began in October.

The FOMC said in a separate statement Wednesday that it elected Powell as its chairman, effective Feb. 3. He will be sworn in as chairman of the Board of Governors on Feb. 5.

“On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2 percent,” the FOMC said, removing a previous reference to declines in inflation in 2017.

Inflation has picked up slightly since the middle of 2017 while remaining short of the central bank’s 2 percent goal. The Fed’s preferred price gauge, a Commerce Department index linked to consumer spending, rose 1.7 percent in the 12 months through December. Excluding volatile food and energy costs, inflation was 1.5 percent.

Yellen isn’t scheduled to hold a press conference after this meeting; her final such event was in December. Fed policy makers will update their economic projections in March, when Powell is also expected to hold his first press briefing as chairman.

New Members

An annual rotation among the 12 regional Fed presidents who vote on the FOMC saw Loretta Mester of Cleveland, Thomas Barkin of Richmond, Raphael Bostic of Atlanta, and John Williams of San Francisco join as members at this meeting. Barkin and Bostic are voting for the first time since taking their posts.

The committee also reviewed its long-run policy goals statement at the January meeting and reiterated its support for the 2 percent inflation target, approving a statement that updated the long-run normal rate of unemployment to 4.6 percent — the median in projections from December.

Several Fed officials have called for a rethink of the central bank’s policy framework, which could include aiming for a higher inflation target, or allowing prices to rise faster to make up for the time that they were too low.

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