At its policy meeting on Wednesday (January 31), the Federal Reserve announced that it would keep the federal funds rate unchanged in the 1.25%-1.5% range, but indicated that inflation is expected to rise in 2018, suggesting a continued gradual pace of interest rate hikes.
Fed Stands Pat to Start the Year, Bidding Farewell to Yellen
This policy meeting was the last one chaired by Janet Yellen. On February 5, Jerome Powell will be sworn in as the new Chair of the Federal Reserve.
It is reported that Yellen took office as Fed Chair in 2014. Early in her tenure, she repeatedly delayed the pace of interest rate hikes to stimulate employment and prices, only announcing a rate hike in December 2015, and began gradually shrinking the balance sheet starting last October.
UBS Chief US Economist Seth Carpenter pointed out that while the US is currently at full employment, the government is still further stimulating the economy through fiscal policies such as tax cuts, which will become a challenge for Powell.
'Hawkish' Tone Hints at March Rate Hike
While keeping interest rates unchanged, the Federal Reserve stated in its post-meeting monetary policy statement that since the December meeting, the US labor market has continued to strengthen and economic activity has been growing at a solid rate. Employment, household spending, and business fixed investment have all increased steadily, and the unemployment rate has remained low.
The Federal Reserve expects the US economy to expand moderately in 2018, and the labor market to remain strong. At the same time, the Fed also stated that "inflation on a 12-month basis is expected to rise this year and to stabilize around the Committee's 2 percent objective over the medium term."
The market interpreted this language as hawkish, hinting at a rate hike in March.
Goldman Sachs also stated that this statement implies the Fed will raise rates at its March meeting, unless economic conditions deteriorate sharply.
How Many Times Will the Fed Raise Rates This Year?
Regarding the timing and scale of future adjustments to the federal funds rate target range, the Federal Reserve stated that the Federal Open Market Committee (FOMC) will make decisions based on assessments of labor market conditions, inflation pressures and inflation expectation indicators, and financial market conditions.
The FOMC stated in its announcement: "The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate."
In this regard, Reuters cited a report to clients by Barclays Chief US Economist Michael Gapen, stating, "The use of 'further' opens the door to four rate hikes (this year), though it may end up being two."
According to the policy meeting last December, Fed officials expected three rate hikes this year, provided there is no serious disruption in market conditions.
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