Although the fed funds rate target is expected to remain at a 1.25% to 1.5% target range and the post-meeting statement is likely to be little changed, the Federal Open Market Committee Meeting Tuesday and Wednesday will be anything but boring.

The first question is who will run the meeting. Bets are that it will be Janet Yellen’s swan song. Yellen’s term as chair ends on Feb. 3, after which she will be replaced by Jerome Powell, who has been confirmed by the full Senate, but not sworn in. Yellen, whose term on the Board ends Jan. 31, 2024, plans to leave the Board once Powell is sworn in.

Federal Reserve Board Chair Janet Yellen.
Federal Reserve Board Chair Janet Yellen. Bloomberg News

“We think it is likely she will be Chair at this meeting,” Morgan Stanley economist Ellen Zentner wrote in a paper. “Nevertheless, who leads the January meeting will have no bearing on the policy outcome.”

“Judging from past processes (which admittedly may have no bearing this time), the swearing in of the new Fed Chair will take place on the day the predecessor's term ends,” Zentner wrote.

The January meeting marks the annual rotation of voting membership. This year it brings a more panel that may be more inclined to raise interest rates. Three dovish voters (Minneapolis’s Neel Kashkari, Chicago’s Charles Evans, and Philadelphia’s Patrick Harker) and one centrist (Dallas’ Rob Kaplan) will be replaced by two hawks (Cleveland’s Loretta Mester and Richmond’s new president Tom Barkin), a dove (Atlanta’s Raphael Bostic) and a centrist (San Francisco’s John Williams). Although Barkin has no track record, he is expected to be a hawk, since Richmond’s president generally leans that way.

“[T]he 2018 voting membership of the FOMC is likely to be a bit more on the hawkish side than in 2017, though it must be remembered that all members, voting or not, participate in the discussion, so one should not make too much of this,” Paul Mortimer-Lee, chief market economist and head of U.S. economics at BNP Paribas, wrote in a note.

BNP believes the outgoing voters “have rate projections for 2018 below the Committee’s median three hikes.” With three vacancies on the Fed Board (and technically four once Yellen leaves until Marvin Goodfriend officially joins the panel), Mortimer-Lee said, “[I]t is too soon … to be at all clear about where the Committee as a whole will stand on the hawk/dove spectrum. Moreover, the increased recent discussion around modifying the inflation target has a dovish tint.”

Morgan Stanley sees quarter-point rate hikes in March, June and September.

Jeffrey Cleveland, Payden & Rygel chief economist expects four increases in 2018, one at each meeting that’s followed by a press conference, as he espoused in a Bond Buyer podcast. He suggested the Fed would have a clearer picture of the impact of tax reform when it makes predictions in March.

BNP Paribas continues to expect three rate hikes in 2018. “While the market is currently pricing a bit more than two hikes for the year, we think the risk lies on the side of more hikes, instead of fewer,” BNP’s Mortimer-Lee wrote.

“Overall, we expect only small changes to the January meeting statement,” Mortimer-Lee writes. “We think the language qualifying data after the third quarter hurricanes will likely disappear. We expect the assessment of current conditions to remain the same, with the Committee continuing to describe job gains and the rate of economic growth as ‘solid’, and the rate of household spending as ‘moderate’.”

While the panel could upgrade its assessment of household spending, Mortimer-Lee termed it unlikely. “We expect the Committee to retain its current language on inflation,” he wrote. “While break-evens have ticked up about 15bp since the December meeting, we do not think this will justify a change in language relating to market-based measures of inflation compensation, which will likely still be characterised as remaining low.”

Morgan Stanley expects the statement will say inflation “has been running closer” to the Fed’s 2% target, noting the December increase. Also expected is a tweak to unemployment, which Zentner expects the statement to say “stayed low.”

Friday’s advance fourth quarter GDP showed less growth than expected, but the core PCE, the Fed’s preferred inflation measure) rose to 1.9% for the quarter, up from 1.3% in the third quarter.

“While policy is not expected to be changed at next week’s meeting, if there are any changes to the accompanying statement, it can expected to be more hawkish given the recent economic strength,” according to Mary Ann Hurley, vice president of fixed income trading at D.A. Davidson & Co. She sees a rate hike in March.

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