With the Federal Reserve again passing on the chance to move interest rates higher this month, S&P Global Ratings is expecting the Federal Open Market Committee to tick the target range for the federal funds rate up by 25 basis points in December.
Coinciding with the announcement of a new Fed chair coming in 2018 if approved by the Senate, S&P Global Ratings explained that policymakers could have decided to leave interest rates alone for the balance of the year.
“U.S. inflation remains subdued and, on its own, should have been enough to give the Federal Reserve reason to pause on raising rates this year,” analysts said. “Indeed, with the personal consumption expenditures deflator at just 1.3 percent year over year in September, it seems that, rather than raising rates, the Fed would use that time to monitor the impact of its balance sheet reduction — which started in October — on the economy.
“However, it appears that concerns about the risk of falling behind the curve, reinforced by favorable financial conditions and solid GDP growth, will — for most Federal Open Market Committee members — outweigh concerns about currently soft inflation, resulting in a rate hike in December,” analysts continued.
In the statement released last week after the November FOMC meeting, the Fed left rates unchanged at 1 percent to 1.25 percent. S&P Global Ratings honed in on one segment of policymakers’ latest assessment, especially when they described growth as “solid” when evaluating U.S. economic health.
“The committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal,” the Fed said. “The committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.
“However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data,” the Fed added.
Beyond the expectation that an interest-rate increase is coming in December, S&P Global Ratings also projected that three more rate upticks would come in 2018, consisting of 25 basis points each.
“How fast the Fed moves next year will depend on whether the softer inflation was as short-lived as it conjectured. But, if inflation does not warm, the Fed may have to acknowledge that something more persistent is to blame and will be forced to modify monetary policy accordingly,” analysts said.
Should the Senate confirm him, overseeing those decisions would be Jerome Powell as chairman of the Board of Governors of the Federal Reserve System. If approved by lawmakers, Powell’s four-year term would begin on Feb. 3.
Powell has been a member of the Fed’s top group since May 2012.
As President Trump made the announcement, the White House said in a statement, “Mr. Powell has demonstrated steady leadership, sound judgment and policy expertise. Mr. Powell will bring to the Federal Reserve a unique background of Government service and business experience.”
In accepting the nomination, Powell said, “I am both honored and humbled by this opportunity to serve our great country. If I am confirmed by the Senate, “I will do everything within my power to achieve the goals assigned to the Federal Reserve by the Congress: stable prices and maximum employment.
“In the years since the global financial crisis ended, our economy has made substantial progress toward full recovery. By many measures we are close to full employment, and inflation has gradually moved up toward our target,” Powell continued.
“Our financial system is without doubt far stronger and more resilient than it was before the crisis. Our banks have much higher capital and liquidity, are more aware of the risks they run and are better able to manage those risks,” Powell went on to say. “While post-crisis improvements in regulation and supervision have helped us to achieve these gains, I will continue to work with my colleagues to ensure that the Federal Reserve remains vigilant and prepared to respond to changes in markets and evolving risks.”
Powell would replace current chair Janet Yellen, who has been in the post since February 2014.
“I congratulate my colleague Jay Powell on his nomination to be Chairman of the Federal Reserve Board,” Yellen said.
“Jay’s long and distinguished career has been marked by dedicated public service and seriousness of purpose,” she continued. “I am confident in his deep commitment to carrying out the vital public mission of the Federal Reserve. I am committed to working with him to ensure a smooth transition.”
And with change coming at the top, the Federal Reserve Bank of New York also announced that its president and chief executive officer. William Dudley, intends to retire from his position in mid-2018 to ensure that a successor is in place well before the end of his term.
Dudley’s term ends in January 2019 when he reaches the 10-year policy limit in the role.
Dudley joined the New York Fed in 2007 as executive vice president and head of the Markets Group, where he also managed the System Open Market Account for the FOMC.
He was named the 10th president and CEO of the New York Fed on Jan. 27, 2009, taking over the remainder of his predecessor’s term. Dudley was appointed for his first full term as president and CEO in 2011 and reappointed last year.
“I have deeply appreciated Bill Dudley’s enormous contributions to the FOMC, his wise counsel and warm friendship throughout the years of the financial crisis and its aftermath,” Yellen said. “The American economy is stronger and the financial system safer because of his many thoughtful contributions. The Federal Reserve System and the country owe him a debt of gratitude.”
Dudley added, “For someone who has always had an interest in public policy and service, leading the New York Fed and being a member of the FOMC has been a dream job. I have had the honor to work at the Fed with colleagues who are amongst the most dedicated and talented public servants anywhere.”