Fed holds interest rates at Yellen’s last meeting as chair, sees inflation picking up

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Jason Reed/Reuters

  • The Federal Reserve left its benchmark interest rate unchanged, as expected, at Janet Yellen’s final meeting as chair.
  • Inflation should stabilize around its 2% target this year, the Fed said, in an update to its previous language on one of its mandates.
  • Traders expect the next rate hike in March, during the first meeting with Jerome Powell as Fed Chairman.

The Federal Reserve left interest rates unchanged, as expected, at Janet Yellen’s final meeting as chair.

In a unanimous vote, the Federal Open Market Committee left its benchmark interest rate unchanged in a range of 1.25%-1.50%. It’s expected to hike again during its meeting in March.

The biggest change to the Fed’s statement was on inflation. The FOMC acknowledged that inflation expectations recently increased, and said it expected the rate of price changes “to move up this year” and stabilize around its 2% objective “over the medium term.”

Although inflation is still not running at the Fed’s 2% target, it has stopped falling. Additionally, the 10-year inflation breakeven rate – one of the market-based measures of inflation expectations that the Fed tracks – has risen to its highest level in over three years.

On the economy, the Fed removed references to hurricane-related disruptions and rebuilding efforts, several months after deadly weather slammed into the Southeastern US. “Gains in employment, household spending and business fixed investment have been solid, and the unemployment rate has stayed low,” the Fed noted.

However, it maintained that risks to the economy were “roughly balanced.”

Jerome Powell, who was nominated by President Donald Trump, will replace Yellen next week and is expected to largely maintain her cautious policy approach.

“While there is a lot of continuity between Yellen and Powell, many other faces on the committee are changing, and this could mean a Fed that is more inclined to raise interest rates than what we’ve become accustomed to under Janet Yellen,” said Greg McBride, the chief financial analyst at Bankrate.com.

Here’s the full text of the statement:

Information received since the Federal Open Market Committee met in December indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. Gains in employment, household spending, and business fixed investment have been solid, and the unemployment rate has stayed low. On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2 percent. Market-based measures of inflation compensation have increased in recent months but remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong. Inflation on a 12‑month basis is expected to move up this year and to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1-1/4 to 1‑1/2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

Voting for the FOMC monetary policy action were Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Loretta J. Mester; Jerome H. Powell; Randal K. Quarles; and John C. Williams.