Little Change as Yellen Exits

In Janet Yellen's swan song as Chair of the Federal Reserve, she exited on a quiet note. The Federal Reserve did what just about everyone expected earlier today, keeping short-term interest rates unchanged while providing forward guidance that economic growth remains on track for further hikes in 2018. The federal funds rate remains in a range from 1.25 - 1.50% and the Fed continues to pay banks 1.50% on their reserve balances.

The primary changes in the language of today's statement reflect increased confidence that inflation is moving towards the Fed's 2% target. While the December statement noted that inflation was "expected to remain below 2% in the near term", the Fed now expects inflation to "move up this year and stabilize around the Committee's 2 percent objective in the medium term."

In addition, language related to fluctuations in hurricane-impacted data in late 2017 has been removed, with the focus shifted to the current "solid" growth in employment, household spending, business fixed investment, and overall economic activity.

In our view, monetary policy remains too loose and the economy can handle higher short-term rates. Nominal GDP (real GDP growth plus inflation) is up 3.9% per year in the past two years, leaving plenty of room for more rate hikes in 2018-19.

Taken as a whole, today's statement should serve to reinforce market expectations for three rate hikes in 2018, with the chances of a fourth rate hike higher than the chances of seeing just two.