Federal Reserve officials announced Wednesday that they had unanimously decided to hold their interest rate target steady, bringing an end to the Janet Yellen era.
Trump appointee Jerome Powell, currently a member of the Fed’s board of governors, will move to the head of the table to become chairman of the central bank after Yellen leaves this weekend.
Investors didn’t expect a big move from the Fed at Wednesday’s meeting, but mostly anticipate that the central bank will implement another rate increase in March as an attempt to keep pace with the improving economy.
Wednesday’s statement contained little news, although it noted that the Fed expects inflation to “move up this year” and stabilize near the 2 percent target. The announcement was silent on the effect of the tax cuts.
During Yellen’s tenure, which began in 2014, the Fed’s target short-term interest rate has risen from near zero to between 1.25 percent and 1.5 percent.
Under Yellen, the central bank has prepped markets for what’s to come over the next few years, namely a gradual exit from the emergency measures it took during the financial crisis. Investors expect more gradual rate increases over the years ahead. They’re also prepared for the Fed to slowly and steadily shrink the size of its balance sheet over the next few years by not rolling over some bonds as they mature. Currently, the Fed’s balance sheet is more than $4.4 trillion, up from $900 billion before the financial crisis.
The Fed is slowly reversing the stimulus because Yellen and other officials believe that the economy will continue to recover, requiring the Fed to tighten monetary policy before inflation rises too high.
Yellen took office in February 2014. During that time, the unemployment rate has dropped from 6.7 percent to 4.1 percent, while the labor force participation rate has remained nearly steady after a long decline. The number of long-term unemployed has dropped by nearly 2.5 million.
Most Fed officials, including Powell, see the economy as near “full employment,” meaning that unemployment cannot go too much lower without inflation rising above target.
Inflation ran below the Fed’s 2 percent target for all of Yellen’s tenure, except for two months in early 2017.
Yellen and the majority of the Fed’s monetary policy team have said that they expect prices to rise faster as job gains mount. Not all agree, though. In December, regional bank presidents Neel Kashkari of Minneapolis and Charles Evans of Chicago dissented from the decision to raise rates on the grounds that they are not confident that inflation will rise.
Below-target inflation is a problem, in the Fed’s eyes, because it suggests that growth could be stronger with looser money. The low inflation of Yellen’s tenure could suggest that job growth could have been higher with a more appropriate Fed policy, said PNC economist Gus Faucher. “There are costs to having inflation below target, just as there are costs to have inflation above target,” he said.
New regional Fed bank presidents assumed voting roles on the Fed’s monetary policy committee in the meeting, the first of the year. Thomas Barkin of Richmond and Raphael Bostic of Atlanta are new to the Fed and haven’t voted on money supply decisions before. Cleveland’s Loretta Mester and San Francisco’s John Williams rotated back onto the committee.
