Fed holds off rate move for Yellen exit

Posted: February 1, 2018 at 2:02 a.m.
Updated: February 1, 2018 at 2:02 a.m.

The Federal Reserve voted unanimously Wednesday to keep its key interest rate unchanged at 1.25 to 1.5 percent. The move was widely expected as the Fed didn't want to rile markets this week as Fed Chairman Janet Yellen steps down and Jerome Powell, President Donald Trump's pick, takes over the reins of the central bank. Powell is set to be sworn in Monday at 8 a.m.

The change in leadership at the central bank is taking place at a time of strength for the U.S. and global economies, which should help ensure a smooth transition. In a statement after its two-day policy meeting, the Fed praised the "solid" gains in hiring, household spending and business investment.

Unemployment is at a 17-year low, growth has picked up in recent months, and inflation has remained low. Perhaps the only concern is a stock market that keeps hitting record highs, but the Fed has said its main focus is the health of the wider economy, not daily market moves.

"I think this initial handoff from Yellen to Powell is going to go pretty well. He'll take the baton and run smoothly with it in his first lap," said Stuart Hoffman, senior economic adviser for PNC Financial Services Group.

The Fed is strongly hinting that it is likely to increase interest rates at its next meeting in March. The committee that sets interest rates went out of its way to say that it expects inflation to hit -- or at least come very close to -- the Fed's 2 percent target this year. Persistently low inflation has been the main stumbling block holding the Fed back from faster rate increases.

"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," the Fed wrote in its statement. There was no news conference after the policymaking meeting for the Fed to explain its thinking any further.

The Fed projects three rate increases this year.

In recent years, the central bank has overestimated how many times it will raise rates, but economists say this time might be different. The recently enacted Republican tax cuts are likely to pump up growth, forcing the Fed to pump the brakes so inflation doesn't get out of hand.

"Powell tends to err on the side of caution," said Lindsey Piegza, chief economist at Stifel. "It will be difficult in his mind to justify additional rate increases."

Powell, a lawyer and former private equity executive, has been a member of the Fed board since 2012. He has served under Yellen and is expected to keep many of her "slow and steady" policies in place.

Yellen is widely praised for her tenure as chairman, and many on Wall Street hoped she would be reappointed, as is typical under a new administration. She has presided over one of the largest drops in unemployment and greatest rises in stocks of any Fed chairman.

Business on 02/01/2018