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Janet Yellen Leaves Fully-Cooked Policy In The Fed Fridge With Microwave Instructions For Jay Powell

He can't screw it up now, can he?

Janet Yellen's final FOMC meeting was a muted end to what turned out to be an innovative and in many ways surprising tenure for the chair.


The statement issued at the meeting also sets up the Federal Reserve to more firmly focus on prices and meeting its long-run inflation target as a primary policy concern under incoming Chairman Jay Powell.

The re-shuffled Federal Open Market Committee opened 2018 by keeping interest rates at a target range of 1.25% to 1.50%, and generally kept their outlook for continued low unemployment and improving growth the same as at their final meeting last year. There was a bit of a muddled message then, though, as two FOMC officials cast dissenting votes to keep rates lower, and Yellen faced questions about the bank's forecast for a number (between 3 to 5) of rate hikes in the next two years even though inflation has continued to run below the Fed's long-run two percent target.

The new committee membership clarified things at this January meeting, and displayed the incrementalist and clear-signaling approach to nudging its tightening cycle forward that defined Yellen's era. They noted that, while still low, evidence of wage inflation has begun to rise in recent months, and said that they believe inflation will move up during the next twelve months. Many economists and Fed officials have said that wage inflation will precede broader increases in prices, so the committee is essentially signaling here that they sense the first rumblings of upward pressure that will take inflation to or past their 2% target in a consistent manner.

Yellen will certainly be remembered for leading the central bank's gradual but consistent tightening of policy, and push to move interest rates off the zero-bound where they had fallen during the financial crisis. That task, at least in January 2018, appears to have been a major policy success (and an unexpected one for critics who suggested Yellen's dove-ish tendencies would prevent her from any sort of tightening regime). As part of this effort, Yellen and other policymakers demonstrated a mastery of the communication and forecasting tools developed under her predecessor Ben Bernanke. Rather than being subject to the cryptic vagaries of a single policymaker as they were under Alan Greenspan, market expectations are now much more systematically and coherently guided.

This was an important development: the Fed had never worked its way out of a rock-bottom rate stance before, and Yellen had seen firsthand during the 2013 Taper Tantrum how edgy and volatile markets could be when the Fed signaled that it was drawing back any amount of the enormous support it had deployed to stabilize the economy. So it is impressive that the Fed has materially lifted rates and tightened policy, as well as settled on and started a plan to shave trillions from its balance sheet, all without upsetting the progress made on growth and improving the labor markets.

Which brings us again to this first statement of 2018. The consistent, and consistently inexplicable shortfall of inflation from the bank's 2% target amid all the economic improvement, has been the one area where the bank has fallen short on its own goals during the Yellen era. The FOMC hinted in this statement that, under Powell, inflation now may begin taking a front seat when it comes to policy deliberations. Then again, Powell is a bit of a cypher when it comes to monetary policy, and Yellen's time as a moderate policy-tightening chair is a reminder that economic necessity can lead to outcomes that would be hard to predict when the central bank gets a new leader.



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