Yellen era ends with Fed set for March rate rise

Janet Yellen kept the Federal Reserve on course for a further interest rate rise in March in her final meeting as chairwoman of the central bank, with the inflation outlook strengthening and America's jobs market continuing to heat up.

The Federal Open Market Committee held its target range for the federal funds rate unchanged at 1.25 to 1.5 per cent, as widely expected, while giving an upbeat assessment of the economy's recent performance and stressing "further" rate rises lie ahead.

The committee upgraded its near-term outlook for inflation, saying it expected year-on-year readings to “move up this year” before stabilising around its 2 per cent goal in the medium term. Expectations for inflation in financial markets have risen in recent months, even if they remain low, the central bank said.

“Gains in employment, household spending, and business fixed investment have been solid, and the unemployment rate has stayed low,” the Fed said in a statement, while retaining its view that the risks to the outlook remained “roughly balanced”.

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Ms Yellen is days away from handing over to her successor Jay Powell after a single four-year term as chair in which she began gradually withdrawing the crisis-era monetary stimulus the Fed injected into the economy. Her tenure at the Fed has been marked by steady growth, a more buoyant jobs market with the lowest unemployment since 2000, and increasingly effervescent asset prices.

Mr Powell, who will be sworn in as chairman of the Fed’s board of governors on Monday, inherits a carefully laid-out monetary outlook involving an expected three rate rises this year and a steady reduction in the size of the Fed’s balance sheet.

But the new chairman will quickly face major decisions as he responds to rapidly evolving conditions. With the US government injecting added fiscal stimulus in the form of tax cuts and higher federal spending, and asset prices arguably starting to look overvalued, some analysts predict the Fed under Mr Powell will have to assert itself more aggressively.

Traders widely expect the next rate increase to be announced at the Fed’s next meeting following three rises in 2017. Futures pricing suggests investors are placing the chances of another quarter-point move in March at around 75 per cent, with many also pencilling in an increase in June.

Stocks climbed immediately following the release of the Wednesday statement but then flattened out to trade in line with where they were beforehand. The S&P 500 was up 0.2 per cent, while the Dow Jones Industrial Average was up 0.5 per cent and the Nasdaq Composite gaineed 0.3 per cent.

The dollar index, a measure of the US currency against a basket of global peers, was flat at 89.16 having already recovered declines from earlier in the session ahead of the statement. The yield on the benchmark 10-year US Treasury note was up 2.1 basis points at 2.747 per cent, continuing its recent trajectory higher. Bond yields move in the opposite direction to prices.

In a recent interview Bill Dudley, the New York Fed president, said he worried that the economy could "overheat", meaning inflation might not stop at 2 per cent, or 2.1 per cent or 2.2 per cent, forcing the Fed to step on the brakes a bit harder.

The Fed stuck with its cautious approach to rate rises in its statement, however, saying: “The committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate.”

Some policymakers are wary of tightening given the failure of the Fed’s favoured measure of core inflation to hit its target for over five years. There were no dissents against the decision to hold rates in the January meeting.

The Fed is in the middle of a series of changes at the top of the organisation that will create added uncertainty over the path of policy. The White House is on the hunt for board members including a successor to Stan Fischer, who stepped down as Fed vice-chairman in October, and the powerful New York Fed needs to replace Mr Dudley when he retires this summer. – Copyright The Financial Times Limited 2018