Investments, Treasury

Yellen’s FOMC adds another 25 basis points to Fed Funds Rate in Dec 2017

December 14, 2017

Yellen’s FOMC adds another 25 basis points to Fed Funds Rate in Dec 2017

As expected, Yellen’s FOMC hike their Fed Funds Rate from a range of 1.00% to 1.25% to 1.25% to 1.50%. Market appears to be rather nonchalant about the decision as if everything was priced in and there were no surprises.

What were the changes?

On Economic Outlook

Nov: “Information received since the Federal Open Market Committee met in September indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate despite hurricane-related disruptions.”

Dec: “Information received since the Federal Open Market Committee met in November indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate.”

Reference to the hurricane were dropped.

On Jobs

Nov: “Although the hurricanes caused a drop in payroll employment in September, the unemployment rate declined further.”

Dec: “Averaging through hurricane-related fluctuations, job gains have been solid, and the unemployment rate declined further.”

Hurricane had limited impact on jobs, in fact, more jobs were created.

 

On Inflation

Nov: “Gasoline prices rose in the aftermath of the hurricanes, boosting overall inflation in September; however, inflation for items other than food and energy remained soft. On a 12-month basis, both inflation measures have declined this year and are running below 2 percent.”

Dec: “On a 12-month basis, both overall inflation and inflation for items other than food and energy have declined this year and are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.”

Inflation levels and expectations remained below Fed’s 2% target.

On Hurricanes

Nov: “Hurricane-related disruptions and rebuilding will continue to affect economic activity, employment, and inflation in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term.”

Dec: “Hurricane-related disruptions and rebuilding have affected economic activity, employment, and inflation in recent months but have not materially altered the outlook for the national economy.”

Hurricanes did not have much impact on the economy.

Overall outlook

Nov: “Consequently, the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further.”

Dec: “Consequently, the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong.”

 

FOMC after Yellen in Feb 2018

Yellen will step down as Chairman in Feb 2018, with President Trump’s preferred choice of Mr Jerome Powell most likely to step in as the replacement. What will life be after Yellen?

Frankly, it is hard to guess which way will the Fed go. One needs to be wary of being overly complacent. It is hard to imagine a dovish Fed during such bullish financial markets and under rather rosy macro-economic conditions.

Even cryptocurrencies are having a ball of their time.

My guess is that by not signalling much and playing exactly to market’s expectations, Yellen is leaving her successor more room for maneuver.  This arguably contrasted with the Bernanke-Yellen handover, with Bernanke annoucing the Fed Tapering in 2013 before Yellen took over in Feb 2014. In my opinion, I tend to believe that Bernanke and Yellen had mutually agreed in that before Bernanke’s decision. It allowed Yellen to come in, with the market prepared for the Fed Tapering stance.

By not committing to any big changes, Yellen is allowing Powell to shock the markets or to continue the status quo. Either way, it leaves the door wide open for Powell to make his mark.

Come Feb 2018, Yellen will leave Federal Reserve on a high note.

about author

Seng Ti is currently heading a Treasury & Finance team in a MNC and is active in the Corporate Treasury scene. He enjoys reading and discussing about current affairs, politics, life, wine and lives a normal life with his wife and 2 young kids.