Fed Maintains Interest Rates Amid Inflation Concerns

Janet Yellen, Federal Reserve, interest rates

Janet Yellen's last meeting as Federal Reserve chair

The Federal Reserve decided to keep interest rates unchanged on Wednesday (31 January) and said inflation was likely to rise this year, bolstering market expectations borrowing costs will continue to climb in 2018.

Improved employment figures, increased household spending and capital investment are driving expectations at the central bank for the economy to expand at a moderate pace and the labour market to remain strong, according to Reuters.

Rogoff: Rising interest rates could cause economy to 'unravel'

In a statement following the two-day policy meeting, the Fed said "inflation on a 12-month basis is expected to move up this year and to stabilise" around its 2% target over the medium term.

Policymakers at the Fed have been buoyed by signs in recent months that the economy is picking up speed, in addition to a fall in the unemployment rate from a 17-year low of 4.1%.

The Fed, which raised rates three times last year and forecasted in December three more hikes in 2018, confirmed on Wednesday it expected "further gradual" rate increases will be warranted.

The target range for the federal funds rate currently is 1.25% to 1.5%.

US stocks rose slightly after the Fed statement before paring gains, while short-term interest rate futures showed traders adding slightly to bets the Fed would raise rates three times in 2018, beginning in March.

The likelihood of the three hikes rest on a continued pickup in inflation, which has lingered below target despite a strong job market, and policymakers have said they expect an acceleration this spring.

Powell succeeds Yellen

The Fed also confirmed its rate-setting committee had unanimously selected Jerome Powell to succeed Yellen, effective 3 February, after the Fed governor, who has worked closely with Yellen, was nominated by President Donald Trump and confirmed by the US Senate.

Powell is expected to follow a policy path closely aligned to that of Yellen, who guided the gradual move away from the near-zero interest rates adopted to drive the recovery and spur job growth after the 2007-2009 recession.

BoE unlikely to hike rates until after Brexit deal finalised

David Riley, partner and head of credit strategy at BlueBay Asset Management, said the final judgement on Yellen's term and legacy will not be made for a few years yet, but Powell has a very hard act to follow.

He said: "Jerome Powell will inherit a Fed steadily tightening policy into a US economy expanding at a solid 2.5% clip with the unemployment rate at an almost two-decade low and inflation below its 2% target.

"During her term as Chair, Janet Yellen has been more successful than any of her predecessors in the modern era in meeting the Fed's employment and inflation targets, all the more surprising that she is also the first Fed Chair not to be re-appointed for a second 4-year term.

"An important caveat to the assessment of Janet Yellen's record as Fed Chair is that it is too soon to come to a definitive judgement."

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