Fed Chair Janet Yellen and the FOMC bumped up interest rates by a quarter point before her final major press conference as the bank's leader, though her outlook for the future of the economy was notably reserved despite a looming GOP tax cut and equities markets that continue to boom.
While Yellen will lead one more meeting early next year, that meeting will almost certainly be custodial and focused on the transition of the committee's leadership to her successor Jerome Powell. This was Yellen's final appearance at a policy meeting press conference, gatherings which the Fed usually reserves for its important policy and messaging changes, and she and other Fed policymakers delivered the interest rate hike that markets had expected coming into the meeting.
They accompanied the increase with a quite muddled message about the policy outlook beyond the end of Yellen's tenure, however, and one that will likely. The committee predicted that growth will rise to 2.5% next year before slowing again in 2019 as labor markets and wages improve. At the same time, the Fed said any increases in prices during that period would still keep inflation levels short of the Fed's long-run 2% target until sometime in 2019; meaning that despite the efforts of Yellen's Fed the central bank has still not fully beat back the deflationary influences that have kept inflation below that target since the onset of the Aughts-ian financial crisis. Additionally, two regional bank members of the committee (Minneapolis Fed chief lumberjack and President Neel Kashkari and Chicago Fed President Charles Evans) voted to keep rates at their current level, reflecting a persistent minority view within the bank's policymaker ranks that the Fed has lifted rates as much as defensible given its failure to even consistently graze its own goals for inflation. This argument will continue to have traction going forward because, as Yellen admitted in her press conference, it seems quite likely that the Fed is not fully grasping what factors are at play in the economy that are have held inflation down for so long despite the Herculean efforts to ease financial conditions the Fed has undertaken.
Yellen did touch on some topical items during her final Q&A, as well. The tax reform package nearing completion in the Capitol and its potential wider impacts is one area of "considerable uncertainty," Yellen said, though she added that most FOMC members and observers estimate a "moderate lift" in GDP from the changes. This stance is another that could easily be amended early next year as economists and the Fed's governors understand more about the potential finalized deal. However the implied bump is perhaps even less "moderate" than Yellen admits considering the committee sees growth sliding back to around the 2% level during 2019 despite the labor market and wage improvements, as well as the uptick in growth, it is predicting during the next year. And though Fed officials usually are quite circumspect about commenting on fiscal policy, Yellen did argue that the tax cut's effects on the national debt could once again leave fiscal policy constrained if the economy were to unexpectedly slow.
In many respects this decision -- and the messages with which the Fed delivered it -- seem designed to give Jay Powell as much policy flexibility heading into the beginning of his tenure as possible. FOMC members are signaling that labor markets will continue to improve incrementally, and growth will see a bump next year; at the same time, inflation will be light and remains a problem for the future and steady but quite moderate tightening moves are necessary. Taken altogether it is a decent summation of the overarching policy prerogatives of the Yellen era. And while there has been little indication that Powell has serious disagreements with Yellen about the outlook for the economy and monetary policy, maintaining a consistent stance as she exits allows Powell time now to begin engineering any important policy or messaging changes and to consolidate the slow normalization achievements to which she led the Fed.