Fed Could Signal Changes to Outlook at Yellen's Final Meeting

By Nick TimiraosFeaturesDow Jones Newswires

Federal Reserve officials are likely to keep interest rates steady at their two-day policy meeting that concludes Wednesday, but they could provide clues on whether their 2018 outlook has changed amid a steadily expanding economy.

The meeting is the last Chairwoman Janet Yellen will attend before turning the reins over to her successor, Fed governor Jerome Powell.

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Ms. Yellen isn't scheduled to convene a press conference after the meeting, and officials aren't releasing new economic projections. This leaves just the policy statement to deliver any new clues about how officials' thinking about the economy has evolved since they met in mid-December, when they raised their benchmark short-term rate to a range between 1.25% and 1.5% and penciled in three increases for 2018.

Because markets already expect the Fed to raise rates at its second meeting of the year in March, a bigger question looming over this meeting is the path of policy for the rest of the year. Will the statement offer any clues that officials are thinking about raising rates four times this year?

Here are four things to watch when the Fed releases its statement at 2 p.m. EST:

Taxes and Financial Conditions

Since officials' meeting last month, Congress approved and Mr. Trump signed into law a $1.5 trillion tax cut. Stocks have advanced to new records, raising concerns about potential market froth. And the dollar has moved lower, which should give a boost to economic growth by making U.S. exports cheaper in global markets.

Ms. Yellen, at her press conference last month, said officials' projections had largely incorporated the prospect that the tax cut will spur stronger growth. But this didn't result in any change to their expectations for the path of interest rates.

If the new statement notes the market movements or the tax cut stimulus, that might signal officials are considering more rate increases this year than they expected in December.

The Balance of Risks

In recent months, the Fed's policy statement has referred to the near-term economic risks as "roughly balanced," meaning the prospects of growth that is either stronger than anticipated or weaker than anticipated are about the same.

The Commerce Department's initial estimate of fourth-quarter growth showed final sales to private domestic purchasers, a key reading of output, rose 4.6% on the quarter, even though overall gross domestic product was up at a more measured 2.6% annual rate. Consumer spending was also strong.

One way for the Fed to signal a shift in its thinking about the economy would be to indicate it now sees a bigger risk that growth will exceed expectations.

Inflation Puzzles

Inflation, as measured by the Fed's preferred gauge, is still running below the central bank's 2% target, with consumer prices rising 1.7% in the year ended December. So-called core prices, which exclude the volatile food and energy sectors, rose 1.5% last year. The recent decline in the U.S. dollar and upswing in oil prices should boost inflation in coming months.

Also important to Fed officials, investors' expectations of future inflation rose in January. The 10-year inflation break-even rate, which reflects the yield premium on the 10-year U.S. Treasury note over the comparable Treasury inflation-protected security, has settled recently at its highest levels since last March, before the inflation soft patch hit. The Fed's December policy statement referred to market-based measures of inflation compensation that "remain low." Watch how officials tweak this language.

Dissents

Dissents seem highly unlikely at Ms. Yellen's final meeting, although this year's voting members of the rate-setting Federal Open Market Committee are slightly more inclined to raise rates than those of last year. Two officials who dissented against the December rate increase because they wanted to hold rates steady -- Chicago Fed President Charles Evans and Minneapolis Fed President Neel Kashkari -- don't have a vote this year, due to the FOMC's rotation system.

Two new voters -- San Francisco Fed President John Williams and Cleveland Fed President Loretta Mester -- have expressed support for continued gradual rate increases. Two other voting members this year are Fed newcomers whose rate rise inclinations are less clear: Atlanta Fed President Raphael Bostic took office in June, and Richmond Fed President Thomas Barkin started Jan. 1.

Write to Nick Timiraos at nick.timiraos@wsj.com

(END) Dow Jones Newswires

January 31, 2018 05:44 ET (10:44 GMT)