As investors eagerly await President Donald Trump’s Federal Reserve chair nomination, the central bank’s policy-setting committee will meet quietly in the background this week. If all goes as expected, they’ll announce on Wednesday that they’re holding interest rates unchanged.
Trump plans to announce his pick Thursday and is said to be leaning toward selecting Fed Governor Jerome Powell. Other candidates on his shortlist include Stanford University economist John Taylor, former Fed Governor Kevin Warsh, and current Chair Janet Yellen, whom the president has called “terrific.”
The rate-setting Federal Open Market Committee will review U.S. growth that appears sturdy spite disruptions from a spate of devastating hurricanes. That leaves them on track to raise rates in December, even though inflation remains on the low side. Here’s what to watch for when the policy statement is released at 2 p.m. in Washington:
Fed officials won’t publish quarterly economic projections with this meeting, nor will it be followed by a Yellen press conference. The biggest changes to the statement will probably come from an upgrade in the FOMC’s description of the U.S. economy. That would further cement the case for a move in December, though it’s unlikely that the committee will change the statement’s language to explicitly signal a rate hike. Investors view the probability of a rate increase in December at more than 80 percent, according to pricing in federal funds futures contracts.
“This is the kind of meeting where they’re just happy to mark to market, and leave it at that,” said Steven Friedman, senior economist at BNP Paribas Asset Management and a former New York Fed official. “There’s no real advantage to signaling at this point. To some extent, they still do want to keep their options open.”
Yellen’s term expires in February, so she’ll be around for two meetings — one in December and one in January — whether Trump renominates her or not. If Yellen does depart, she’ll be handing her successor a strong job market and a healthy expansion.
The U.S. economy grew at a 3 percent annual rate in the third quarter and 4.2 percent unemployment is the lowest level since 2001, helping to bring workers back into the labor force and gradually lift wages.
Still, it isn’t an entirely rosy picture. Inflation has remained below the FOMC’s target of 2 percent for most of the past five years, and core inflation, which excludes food and energy, rose at just 1.3 percent in the year through September. Inflation expectations have fallen slightly since the FOMC’s Sept. 19-20 meeting.
The committee is likely to reiterate its view that it is monitoring inflation developments and expects to meet its 2 percent goal over the medium term, said Michael Feroli, JPMorgan Chase & Co. chief U.S. economist.
“Any tweak in the language concerning core inflation would be a big development and the market would respond,” he said, though he added that the Fed chair decision “greatly overshadows” the meeting.
Yellen said Oct. 15 that her best guess is that inflation will soon accelerate and “the ongoing strength of the economy will warrant gradual increases” in the Fed’s benchmark interest rate.
Fed leaders haven’t suggested a rate hike is possible this meeting, and markets put close to zero chance of a surprise. Officials raised rates in March and June and project a third increase by the end of this year, followed by three quarter percentage-point moves in 2018.
“The typical strategy for them in these off-press-conference meetings is to make very few changes to the statement, and to just get in and out without roiling anything,” said Stephen Stanley, chief economist at Amherst Pierpont Securities.
Yellen holds a press conference after every other FOMC meeting. She has repeatedly said that every meeting is “live” for a rate move, but the Fed has only hiked at meetings accompanied by a press conference since it began tightening policy.
The committee is also likely to reiterate that the effects of Hurricanes Harvey, Irma and Maria have caused some disruptions and that rebuilding will add to growth, while not shifting expectations for a continued gradual path of rate increases.
“Correcting for the hurricane effect, the underlying pace of growth was a bit firmer,” said Jonathan Wright, an economics professor at Johns Hopkins University and a former Fed economist. “The important thing though is that the FOMC is much more focused on inflation and inflation expectations, and perhaps financial stability, than growth.”