January 2018 FOMC Preview: Farewell Janet Yellen

Summary:

• No changes expected to Fed funds rate which remain at 1.50%
• January Fed meeting will be the final FOMC meeting chaired by Ms. Yellen
• S. Senate appoints Trump nominee Jerome Powell as the next governor of the Federal Reserve
• Next FOMC meeting due in March 2018

 

The U.S. Federal Reserve will be holding its two day monetary policy meeting this week which will conclude today. The meeting will be followed by the release of the monetary policy statement. Today’s FOMC meeting will also be significant in some aspects as it marks the final FOMC meeting that will be chaired Ms. Janet Yellen.

As far as expectations on monetary policy goes, the markets are expecting to see no changes to the Fed’s short term rates which remain at < 1.50%. The FOMC had voted to hike rates in December last year lifting rates by 25 basis points.

The focus will of course be on the change of guard at the FOMC. Janet Yellen, The Fed Chair’s term will end in February. Last week, the U.S. Senate approved President Trump’s nominee Jerome Powell as the next head of the Federal Reserve.

Powell, already a well known name at the FOMC meetings is expected to carry the mantle forward from Ms. Janet Yellen. Powell is expected to maintain the status quo and the Fed, under his leadership is unlikely to waver much from the current policies.

This means that the Fed could potentially aim for hiking interest rates three times this year while at the same time continuing with the unwinding of the balance sheet operations that it amassed during the years of QE purchases.

Inflation will of course remain the main topic of discussion. Consumer prices are expected to remain weak despite the fact that Fed officials believe that inflation will pick up over time.

However, this thought could just turn out to be right. With the tax reforms already in place and news about President Trump likely to announce his infrastructure spending plans sometime in February, the massive stimulus could eventually lift consumer prices higher.

The recent slump in the U.S. dollar could also have potential impacts as far as trade is concerned. With the U.S. being a major trading partner with most of the developed and emerging economies a weaker currency could potentially benefit the nation.

This was evident from the fact that the U.S. Treasury Secretary surprised the markets by his comments at the World Economic Forum summit in Davos last week. Mnuchin’s comments about a “weaker U.S. dollar being good for the economy” further fuelled more selling in the greenback.

A weaker exchange rate could potentially also add to inflationary pressures in the medium term. Combining the above, it is not hard to miss why the Fed is likely to maintain its optimistic view on consumer prices.

With interest rates being hiked to 1.50%, the Fed is likely positioned in a comfortable spot as it can continue to hike rates before inflation starts to rise strongly; albeit this might come at the expense of some dissenting votes and critics.

However the fact that there are a number of vacant FOMC seats to be filled up gives inclination to the fact that eventually the hawks could dominate the doves on the FOMC voting committee.

As far as economic data is concerned, with the exception of the December jobs report and the ISM manufacturing and non-manufacturing report, the data was broadly consistent.

The preliminary GDP data for the fourth quarter released on Friday showed that the U.S. economy advanced 2.6% on the quarter. Although this was a slower pace of increase and much below the forecasts, the data was consistent with the economy managing to expand faster than compared to the previous year.

Based on the above factors and considering that the next FOMC meeting will be held in March, today’s Fed meeting is likely to pass off as a placeholder.