U.S. Fed Signals December Hike On Track A Day Before Trump Announces Fed Chair

(Bloomberg) -- Federal Reserve officials voted unanimously to leave interest rates unchanged while signaling they remain on track to hike once more this year, a day before President Donald Trump plans to unveil his choice to lead the U.S. central bank.

Recent data indicate that “the labor market has continued to strengthen and that 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.

Officials gave no sign that their expectations for a third interest-rate increase this year have been derailed. 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.”

The statement is likely to reinforce expectations for a December hike. Pricing in federal funds futures contracts prior to the release implied an 85 percent probability of a quarter- point move next month, when Chair Janet Yellen is scheduled to hold her next press briefing.

All four rate hikes since late 2015 have come at gatherings that were accompanied by a press conference, which occur at alternating meetings.

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.

Core Inflation

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.

The Trump White House has yet to announce any nominees for three additional vacancies on the seven-member Board of Governors.