Fed Watch: (Slight) optimism about inflation

01-31-2018

With no dot plot and no press conference, traders expected Janet Yellen’s final Federal Open Market Committee (FOMC) meeting to be a non-event. Federal Reserve policymakers did indeed abstain from raising the fed funds rate from its 1.25-1.50% range, as widely anticipated. However, there was a bit of a surprise in the Fed’s more upbeat assessment of inflation conditions, particularly in light of this week’s steady 1.5% read of core PCE inflation, stubbornly stuck below the Fed’s 2% target. This caused short and intermediate Treasury yields to tick up marginally, although the Fed continued to emphasize that rate hikes would be gradual. There was no mention in the statement about the potential impact of the December tax cuts on monetary policy. The March meeting will soon become the focus of trader anxiety as the market begins to scrutinize Jerome Powell’s chairmanship and what implications it will have for both interest rates and risk assets.