Three Expectations for the Fed's First Meeting

Blog posted On January 30, 2018

The Federal Open Market Committee (FOMC) will meet today and tomorrow for its first policy meeting of 2018.  This will be the last official meeting with Janet Yellen as Federal Reserve Chair; Jerome Powell will take over the position in February.  The FOMC is expected to leave rates unchanged following this meeting and there is no press conference scheduled for Wednesday’s announcement.  Based on December’s dot plot, the Fed will likely raise the benchmark interest rate multiple times in the coming year, though Fed officials are not in agreement as to how many rate hikes will take place.  Here’s what to expect from the upcoming meeting.

Gross Domestic Product (GDP) Missed Target, but Remains Strong

Although the first estimate of 2017 fourth-quarter GDP was under 3%, internal investment and consumption were strong.  Consumer spending hit an annual pace of 3.8%, with spending on vehicles, clothing, and healthcare leading the charge.  Based on current data, GDP expanded at an annual rate of 2.3% in 2017, much stronger than the 1.6% annual rate in 2016. 

Rate Hikes Expected to Continue

Based on global growth and internal inflationary pace, three 25-basis-points rate hikes are expected in 2018, with the first expected to take place in March.  Incoming Federal Reserve Chair Jerome Powell’s outlook on economic policy does not differ greatly from the Fed’s current course of action.  In a Washington Post article, president of DC money management firm Farr, Miller, and Washington, Michael Farr explained, “He is a balanced, thoughtful guy.  He’s neither a hawk nor a dove.  He’s a pragmatist who will pursue an economic good and turn a deaf ear to politics.”

Balance Sheet Reduction Sidelined

Though the Fed opened the discussion on winding down the federal balance sheet last year, action is not likely to take place any time soon.  Bloomberg contributor, Mohamed A. El-Erian, predicted, “The previously announced timeline won’t be revised or even highlighted in any major way.”

Economic growth has maintained a modest-to-moderate pace for much of the past few years.  Incoming Federal Reserve Chair Jerome Powell is likely to build on Janet Yellen’s established policy as long as growth continues at this pace. 

Sources: Bloomberg, CNBC, MarketWatch, Washington Post