Fed Signals December Hike on Track as Trump Mulls Next Chair

(Bloomberg) -- Federal Reserve officials reinforced expectations for a December interest-rate increase by subtly upgrading their assessment of the U.S. economy, a day before President Donald Trump plans to unveil his choice to lead the U.S. central bank.

“Economic activity has been rising at a solid rate despite hurricane-related disruptions,” the Federal Open Market Committee said in a statement Wednesday following a two-day meeting in Washington at which they left rates unchanged as expected.

After its meeting in September the FOMC said the economy was expanding “moderately.” Wednesday’s statement marked the first time since January 2015 that the committee used the word “solid” to describe growth.

The Fed repeated its assessment that while inflation may remain “somewhat below 2 percent in the near term,” it’s expected to stabilize around the central bank’s 2 percent objective “over the medium term.”

“Any upgrade of their view on economic activity also translates into their conviction of whether inflation will rise to 2 percent over time,” said Michael Gapen, chief U.S. economist at Barclays in New York. “They’re reaffirming the view that a December hike is in their baseline, and it’s in ours as well.”

Pricing in federal funds futures contracts prior to the release implied an 85 percent probability of a quarter-point move next month, and remained at about that level after the statement.

Chair Janet Yellen is scheduled to hold her next press briefing after the meeting scheduled for Dec. 12-13. All four Fed rate hikes since late 2015 have come at gatherings that were accompanied by a press conference, which occur at alternating meetings.

Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, said he also expected a December hike.

“There were only a few minor changes to keep it up to date with the latest economic numbers,” he said. “They did note that core inflation remains soft, but I think they had to change it -- that was kind of marking to market.”

U.S. stocks were mainly higher and the dollar erased a slight gain after the Fed’s announcement, while Treasury yields edged higher with the 10-year note adding around two basis points to 2.37 percent.

Bigger Drama

Policy makers wrapped up their meeting as the larger drama surrounding the Fed’s future leadership approached its climax. Just before the FOMC statement was released, Trump said he’ll announce his pick Thursday afternoon, adding that people will be “extremely impressed with this person.”

The president is leaning toward picking Fed Governor Jerome Powell, according to three people familiar with the matter, though he has also been considering other candidates including Yellen, whom he called “excellent.”

Powell, a Republican and former Treasury official, has supported Yellen’s policy of gradual rate increases while calling for a modest rollback of post-crisis financial regulation. In more than 40 FOMC votes since becoming a governor in 2012, including this meeting, he has never dissented.

Wednesday’s FOMC decision leaves the benchmark federal funds rate -- which covers overnight loans between banks and helps set the cost of money in the broader economy -- in a target range of 1 percent to 1.25 percent.

A slowdown in inflation this year has renewed worries that price gains are too weak amid a tightening U.S. labor market. Unemployment dropped to 4.2 percent in September, its lowest level since 2001, even as the number of workers on payrolls fell for the first time in seven years thanks to the effects of hurricanes Harvey and Irma.

The Fed’s preferred measure of prices rose 1.3 percent on a yearly basis that same month, after stripping out food and energy components, and has been under its 2 percent goal for most of the last five years.

“Gasoline prices rose in the aftermath of the hurricanes, boosting overall inflation in September; however, inflation for items other than food and energy remained soft,” the FOMC said.

Puzzled by the failure of inflation to advance as forecast, some Fed officials have signaled they might favor holding off on another 2017 rate hike to wait for evidence of faster price rises. Most policy makers, however, have stuck to quarterly projections updated in September that a third move this year is appropriate.

There’s little sign that the storms have thrown the national economy off track. The statement noted that “household spending has been expanding at a moderate rate, and growth in business fixed investment has picked up in recent quarters.”

Storm Impact

Gross domestic product grew at a 3 percent annualized pace in the third quarter, near the previous period’s rate, and the Atlanta Fed’s tracking estimate Wednesday was at 4.5 percent expansion for the fourth quarter.

“Hurricane-related disruptions and rebuilding will continue to affect economic activity, employment and inflation in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term,” the FOMC said.

The statement noted that the Fed is “proceeding” with the trimming of its $4.5 trillion balance sheet that began in October. Reducing the balance sheet tightens monetary policy by removing demand from the bond market.

The meeting marked the first for newly-appointed Governor Randal Quarles, who was nominated by Trump in July and confirmed by the Senate in October. He also serves as vice chairman for supervision, the Fed’s top cop in banking regulation.

--With assistance from Jeanna Smialek

To contact the reporter on this story: Christopher Condon in Washington at ccondon4@bloomberg.net.

To contact the editors responsible for this story: Brendan Murray at brmurray@bloomberg.net, Alister Bull, Scott Lanman, Sarah McGregor

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