Janet Yellen: Mission accomplished? - ING

"With the US economy growing strongly, inflation broadly in line with target and policy being normalised Yellen can sign off her final FOMC press conference satisfied with a job well done," ING economists argue.

Key quotes

Yellen's Swansong

The December 13 FOMC meeting is the last one for Fed Chair Janet Yellen that involves a press conference – the January FOMC meeting will just see a press release - ahead of handing the Fed Chair role to Jay Powell in February. 

Given the economy is in much better shape than it was when she took over from Ben Bernanke and the fact that she is both hiking rates and shrinking the Fed’s balance sheet, Yellen can take immense satisfaction from the job she has done. In terms of what to expect, markets widely anticipate a 25bp hike, after which we suspect she will sound a cautiously optimistic tone but offer little in the direction of future guidance to give incoming Chair Powell maximum flexibility.

A third hike for 2017

With 3% annualised growth in the second and third quarter of 2017, business surveys suggest the 4Q figure should be just as strong. The combination of robust domestic economic activity, an improving global backdrop and the prospect of meaningful tax cuts mean that 3% is now a realistic possibility for 2018. Inflation is below target, but here too we think there is movement with dollar softness pushing up import costs, a tight labour market suggesting upside risk to inflation and the housing component starting to exert upward influence. Given this backdrop, we see broad support for a December hike within the FOMC.

More work to be done

There is more work to be done though. Even after this hike, we are looking at an economy that is growing at 3% and has inflation of 2% yet the Fed funds target rate will be just 1.25% (lower bound). Currently, the Fed funds futures market is only fully pricing in one additional 25bp rate rise in 2018, despite Federal Reserve officials signalling they think three rate hikes is the most likely path for policy.

While we understand market reticence given the Fed has told us in the past that they would hike and then not carried it through, the US expansion is already amongst the longest on record, and the fact inflation remains low, we have much more sympathy for the Fed’s view than the market’s position right now.