Feds calm fears over monetary policy

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While speaking to reporters after the Fed’s quarter percentage-point move on Wednesday, Federal Reserve Chair Janet Yellen reassured investors that the central bank’s interest-rate increase was not representative of any reaction to fears of faster inflation.

“The simple message is the economy’s doing well. We have confidence in the robustness of the economy and its resilience to shocks,” she said.

According to Yellen, the Fed will stick to its policy of gradually raising interest rates. Policymakers have accounted for two more quarter-point rate increases this year and three in 2018, all of which are unchanged from their initial projections in December.

Today’s decision “does not represent a reassessment of the economic outlook or of the appropriate course for monetary policy,” the Fed chief said.

After several central bank officials, including Yellen, announced that a rate hike was imminent, speculation has mounted that the Fed has decided to be “more aggressive” with their economic forecasts. Expectations were further fueled by the news of rising inflation.

When questioned about the possibility of a fiscal boost, Yellen expressed that the Fed is still waiting for more concrete policy plans from the Trump administration before modifying monetary policy in reaction.

“There is great uncertainty about the timing, the size and the character of policy changes that may be put in place,” Yellen said. “I don’t think that’s a decision or set of decisions that we need to make until we know more about what policy changes will go into effect.”

Yellen, who said that she had previously met with Trump and Treasury Secretary Steven Mnuchin on a couple of occasions, disputed the claims that the Fed was clashing with the Trump administration over its plans to promote faster economic growth through tax cuts and deregulation.

“We would welcome stronger economic growth in the context of price stability,” she said.

While policymakers forecasted inflation would reach 1.9 percent in the fourth quarter of 2017, and 2 percent in both 2018 and 2019, inflation rose 1.9 percent in the 12 months through January, just shy of its target.

Yellen pointed out that core inflation continues to run just below 2 percent. The Fed’s new forecast for the core rate at the end of this year increased to 1.9 percent, from 1.8 percent in December.

“The committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal,” the Fed said.

Stocks rose and bond yields fell as investors viewed the statement from the Federal Open Market Committee and Yellen’s remarks as a sign that the Fed is not anticipating removing the monetary stimulus.

R.J. Gallo, a fixed-income investment manager at Federated Investors in Pittsburgh, asserted that the Fed’s indications prior to this meeting led investors to expect an increase in the number of projected rate hikes this year, yet none materialized.

“You didn’t get any of those things,” Gallo said. “The expectation that Fed was getting more hawkish had to come out of the market.”

While the U.S. economy has met many of the central bank’s goals of full employment and stable prices, it may receive bolstered support if President Trump delivers on his promised fiscal stimulus.

Since Trump won the presidency in November, investor and business confidence has soared–buoyed by his vows to cut taxes, lift infrastructure spending and ease regulations.

While there has been much improvement, the economy isn’t firing on all cylinders just yet, with just the third rate hike since the 2007-2009 recession ended.

In fact, the economy may have “more room to run,” Yellen said.

“It’s uncertain just how much sentiment actually impacts spending decisions, and I wouldn’t say at this point that I have seen hard evidence of any change in spending decisions,” said the Fed Chair. “Most of the business people that we’ve talked to also have a wait-and-see attitude.”

Inflation

small business

H/T: Bloomberg

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