The new Fed Chair brings a new message
What has happened?
The US Federal Reserve got a new leader this month as Jerome Powell took over from Janet Yellen who had run the world’s most prominent central bank since 2014. Yellen was in place at the bank’s most recent monetary policy meeting in January at which the Federal Open Market Committee voted to keep rates unchanged, however, she had departed by the time the minutes from the meeting were published on 21 February. The editing of the minutes was therefore left to Powell and they took on a different tone to those of his predecessor, potentially providing some insight into Powell’s policy stance going forward. Overall the minutes struck a more upbeat tone on the growth prospects of the US. Economic growth was described as “above-trend”, whereas in December economic activity was said to have been rising at a “solid rate”. On inflation, the committee stated that the PCE price index, the Fed’s favoured inflation metric, was “expected to move up this year and to stabilize around the Committee’s 2% objective” and that future developments should be monitored “closely”.
The change in the minutes can probably be best explained by a number of factors. First, economic data have remained broadly strong since the December FOMC meeting took place. According to the Citi Economic Surprise Index, US macro data, on aggregate, have continued to beat expectations, while ISM surveys for both the manufacturing and non-manufacturing sectors have improved and sit at multi-year highs. On inflation specifically, the PCE price index in January rose to 1.5% year-on-year, while the Consumer Prices Index, an alternative inflation metric to PCE, jumped from 1.9% to 2.1% year-on-year, likely contributing to the increased confidence at the Fed that inflation is on its way back to the committee’s target. Secondly, the change can perhaps be explained to some extent by the differing philosophies and backgrounds of the old Fed Chair and the new one. Yellen spent her career either in academia or the public sector, while Powell spent much of his career in the private sector in investment banking and private equity before moving to the Federal Reserve.
What should you take away from it?
In its latest projections in December, the members of the Federal Reserve’s FOMC predicted, based on median forecasts, that it would raise interest rates three times in 2018. The recent minutes and comments from Jerome Powell have led to speculation that the Fed may be indicating that it intends to be even more aggressive in its monetary policy tightening than it had previously guided. The market, based on Fed fund futures, has generally been more conservative in its estimation of the number of interest rate rises this year. At the turn of the year the market had only priced in two rate rises from the Fed in 2018, but now, following Powell’s relatively hawkish start to his Fed tenure, it is pricing in three. The FOMC next meets in March and the market is currently ascribing a 94% probability of an interest rate rise at that meeting. Alongside the decision, the Fed will release its latest economic projections, including the closely followed “dots” chart that will reveal whether committee members are now forecasting four rate rises this year.