Get the hike out. This week the Federal Reserve raised short-term interest rates for a third time this year increasing the target range to 1.25% – 1.50%. The action was widely expected and caused little disruption to financial markets. Equity markets in the US ended up on the day while longer-term bond yields (US 10yr Treasury) were down slightly. There was little to note in the written comments from policy makers; a modest change in the labor market language which did not adjust expectations that unemployment at 4.1% would persist. In her oral remarks, Fed Chairwoman Janet Yellen made several observations. First, she said that her colleagues had factored a fiscal stimulus from the proposed US tax reform into their forecasts. Expectations for GDP growth inched up 0.4% to 2.5%. Inflation and interest rate expectations from the so-called dot plot remained unchanged implying that Fed economists do not see a policy-changing impact yet. That said, she highlighted concern for the larger deficits which come with the package. Yellen said that stock market prices are high by historical standards but did not see anything “flashing red.” Economists, she noted though, do not have the best track record here. When asked, she chimed in regarding her views on bitcoin saying that it is a highly speculative asset, not a significant part of the payments system, and is not a stable store of value.
Altogether, the meeting was remarkable in that is was unremarkable. Yellen has one more meeting as Chairwoman of the policy making body before she steps down in February next year. Under her guidance, there has been substantial progress in normalizing monetary policy and reversing some of the extraordinary monetary support put in place during the crisis. Over the same time, equity markets have trended higher and bond yields have remained contained. After her last meeting at the end of January 2018, she will be handing the baton off to Jerome Powell who is expected to continue a slow pace of normalization. I am sure she wants to get the “heck” out. He is walking into an environment where short-term real rates (after-inflation) are nearly back to zero, the yield curve is flatter than it has been in years, equity market valuations are near 20x in the US, and the rest of his policy making body thinks we are due for three more hikes next year. As we have said often, economic cycles do not die of old age. They die because the Fed kills them. Let’s hope that Powell is not an “undertaker” of this economy as well as its caretaker.