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Farewell Dear Janet

1 February 2018 by Gary Kirk

Janet Yellen bowed out with her last FOMC meeting yesterday evening after what will quite rightly be viewed as successful 4 year term in office; admittedly the Fed fell short of the 2% inflation target during her tenure but the other mandate criteria of maximising employment was effectively achieved. Tomorrow, Mrs Yellen officially packs up her desk and leaves the Fed after 14 years in the Eccles Building and on Monday Jerome Powell will be sworn in as the new Fed Chair.

As expected Fed Funds were kept on hold yesterday at 1.25-1.50% although the rhetoric from the FOMC statement was clearly more hawkish, with the market now pricing in a 99% probability for a ¼ point hike at the next meeting on 21st March. For us the statement didn’t really deliver any surprises; the Fed highlighted gains in employment, increases in household spending and an upbeat assessment on business fixed investment. However, the key issue for markets is inflation: is it merely lagging behind a pick-up in the economy or is going to remain benign? The Fed noted that inflation for items other than food and energy continue to run below the 2% target but the committee expects that economic activity will expand at a moderate pace (with further gradual adjustments to monetary policy) and labour market conditions will remain strong. This is expected to result in inflation (on a 12 month basis) to move up and stabilise around the 2% objective level.

So, that was the end of Janet’s era and we now move on to Mr Powell. Fundamentals remain supportive and the fiscal stimulus from the government should provide additional help in achieving the inflationary target. For us though one of the key factors to keep abreast of is the ongoing discussion regarding the inflationary target itself. Currently having the 2% target level ‘firmly nailed to the mast’ gives the market a high degree of clarity. Rumours that the Fed are to explore setting a ‘target range of inflation’ rather than a hard single number does concern us. Whilst it would give the Fed more flexibility in their rates policy, it would create a far higher degree of uncertainty for market participants. For us this will be one of the key factors to keep aware of in the early stages of the new regime.



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