Amid a busy week from the US last week the FOMC managed to stay in the headlines with two major events. On Wednesday, the FOMC meeting passed off as a non-event. However, the signal that was sent from the central bank was that it was committed to raising interest rates in December.
Later in the week, the US President Donald Trump announced his nomination, Jerome Powell who is a member of the board of governors at the Federal Reserve.
FOMC keeps rate hike options open for December
The Federal Reserve’s meeting last week saw the central bank keeping interest rates unchanged within the 1% – 1.25% band. This was widely expected both by economists and the market expectations. However, the central bank signaled that the option to hike rates in December remained open.
This came despite the temporary distortion to the data in September due to the hurricanes that seemed to disrupt the economic activity in the US. This was later validated by the payrolls report that showed a rebound in the US jobs while revisions to September payrolls data showed that the economy managed to 18k as compared to the initial print of a decline of 33k.
“Information received since the Federal Open Market Committee met in September indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate despite hurricane-related disruptions,” the FOMC statement opened on a hawkish note.
The Fed said in its statement that it expects to see a pick up in the fixed investment in recent quarters. Following the Fed’s announcement, the market expectations were little changed. Right after the FOMC statement, the market expectations remains steady around 87.5% which suggests a high probability of a rate hike in December.
The Fed also maintained its stance of three rate hikes in 2018. However, the markets are currently bracing for two rate hikes. But this could change over the course of the months, especially after the US economy was seen rising three percent in the third quarter ending September.
Further revisions to the upside could potentially cement expectations for the December rate hike while also ensuring that the markets could begin to price in a third rate hike next year as well.
The central bank also mentioned about its monthly bond reduction program. Known as the balance sheet normalization, the Fed began its operations in October starting at a pace of $10 billion a month.
This is expected to now expand to $20 billion in balance sheet reduction started in the first quarter of next year. By the end of 2018, the central bank is expecting to reduce its assets at a pace of $50 billion per month.
Jerome Powell Nominated as the next Fed Chair
In a widely expected move, President Trump made his decision ahead of his tour to Asia. On Thursday, Trump nominated Jerome Powell to head the Federal Reserve as the next Chairman. This comes into effect after the incumbent, Janet Yellen’s term ends in February 2018.
Yellen was nominated to the chair of Federal Reserve in 2014 by the Obama administration while she previously served under Ben Bernanke. The market reaction to Trump nominating Powell was muted. Already a member of the FOMC, Powell is widely expected to stay the course charted by his predecessor.
Powell has been serving on the board of the FOMC since 2012 and has maintained his views of a gradual path for interest rate hikes. As a result, the markets viewed his nomination, which is also likely to pass the Senate vote as well as the next Fed Chair.
Powell is expected to maintain the course which for the markets translates to no major surprises from the current plans.