A Changing of the Guard at the Federal Reserve

Franck Dixmier


The Fed isn’t expected to make major news during its 30-31 January meeting, but Franck Dixmier says this is still an interesting moment. Investors have finally priced in almost three rate hikes in 2018, and we will begin to learn where incoming Fed Chairman Jerome Powell stands on abandoning inflation targeting.

Given that the Federal Reserve just hiked the fed funds rate by 25 basis points in December, we don’t expect any specific announcements to come out of the next meeting of the Federal Open Market Committee. And with no press conference scheduled, we don’t expect much news to be made overall – save for the fact that Janet Yellen will be presiding over her last meeting as chair of the Federal Reserve. Jerome Powell is poised to take over the role on Sunday, 4 February.

However, with 2018 beginning to unfold, this is an interesting moment to analyse the backdrop for the Fed’s monetary policy over the coming year.

The anticipated rate-hike cycle for 2018 has been more fully priced in to the financial market over the past three months. Compare this with the not-so-recent past, when the market seemed to be impervious to the Fed’s more hawkish forward guidance. Investors today seem to be anticipating almost three hikes during 2018, thanks to the more upbeat economic situation in the US. Growth and inflation are both at solid levels, as confirmed by the rise in inflation expectations over recent months.

It will also be interesting to see whether Mr Powell will be willing to entertain debate about abandoning the inflation target. Some FOMC members feel that abandoning the target entirely would be too extreme. Others believe it doesn’t make sense to maintain an overly rigid inflation objective; consider how disappointingly low inflation data could be attributable to one-off factors or to more structural causes.

Our view is that even though the inflation target was designed to provide greater transparency and therefore clearer outlook guidance, it may have instead had the opposite effect by clouding the market’s interpretation of the Fed’s intentions.

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Despite Jitters, Fixed-Income Markets Are Well Supported



A backdrop of stronger US growth forecasts indicates that a recession is unlikely over the next 12 months, says Franck Dixmier. With central-bank liquidity yet to peak, and with long-term rates in Japan and the euro zone at historically low levels, Treasuries remain compelling.