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Changes at the Fed – Janet Yellen’s Swan Song As Chair – Who’s Watching the Store and the Fed’s Policy?

January 30 and 31 will mark the first meeting of 2018 for the Fed Open Market Committee as well as the last meeting for Janet Yellen as Chair.  As we move into the second full year of Trump’s presidency, the composition of the voting members of Board of Governors will change.  Cleveland Fed President Loretta Mester, Richmond Interim Fed President Mark Mullinix (soon to be replaced by Thomas Barkin), Atlanta Fed President Raphael Bostic, and San Francisco Fed President John Williams will replace Chicago Fed President Charles Evans, Philadelphia Fed President Patrick Harker, Dallas Fed President Robert Kaplan and Minneapolis Fed President Neel Kashkari as the latter rotate from voting to non-voting members.

The U3 (official unemployment rate) has decreased from 4.8 percent in January 2017 to 4.1 percent with 148,000 new jobs created, in December 2017. You can view the rates here. The U3 rate has held steady at 4.1 percent for the last three months.  The current inflation rate announced by the US Bureau of Labor Statistics in January 2018 is 2.1 percent.  Following its December meeting, and economic projections, the Fed projected (median projections) that the US economy would grow 2.5 percent in 2018, up from a median forecast of 2.1 percent in September. Ms. Yellen stated at a news conference following that meeting that the tax cut was the primary reason for the higher estimate.  Will the tax cut cause the economy to heat up followed by an increase in interest rates?   So far, the Fed has fallen short of its projected 2 percent inflation target for the last six years.  The internal debate at the Fed has been, for some time now, how quickly it should raise interest rates in relation to inflation.  That will likely continue to be the main focus at the Fed following Yellen’s reign as chair. “One thing is for certain and that is that inflation has become the most important economic variable steering the Fed’s policy,” wrote Chris Rupkey, chief financial economist at MUFG Union Bank.

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