Highlights:
- The target range for the fed funds rate was held steady at 1.25-1.50% in a unanimous decision.
- The Fed’s characterization of the economy remained positive as growth in employment, household spending and business investment were all described as "solid."
- Inflation is expected to "move up this year," and the balance of risks to the outlook remains "roughly balanced" but the Fed continues to watch inflation developments closely.
- The Fed noted market-based measures of inflation compensation have increased – breakeven inflation rates up by more than 30 basis points since mid-December to a three year high – but remain low.
Chair Yellen has to be pleased with the economy she is passing on to her successor, Jerome Powell. Unemployment is at its lowest rate since 2000, domestic spending was firing on all cylinders heading into 2018, and inflation remains well behaved even as the economy is running at or beyond full capacity. Conditions are certainly strong enough to warrant higher interest rates, but in keeping with the gradual, predictable policy changes under her tenure, Yellen and company opted to hold steady and simply set the table for a move in March – exactly what markets have been expecting. We too like the odds of a hike at the upcoming meeting and think a once-a-quarter pace of rate increases will continue thereafter. Our call for four rate hikes this year is slightly ahead of both market expectations and the Fed’s latest dot plot. In our view, any pause in tightening risks falling behind the curve at a time when tax cuts are set to push the economy into excess demand and risk stoking inflation.
