Fed readies market for rate hike in Dec; Stay tuned for announcement of new Fed chair

Anubhav SahuMoneycontrol Research

On expected lines, FOMC kept policy interest rates unchanged but provided a clear signal that it is on track to raise it in the December meeting (Dec 13-14). Market implied probability (from CME group - Chicago Mercantile Exchange) for the Fed policy rate hike has, as a result, increased to 100 percent. A quarter point rate hike, if it happens in December, would raise the target Fed funds rate range to 1.25-1.50. This incidentally would also be a two-year anniversary of the rate hike cycle that commenced in December 2015.

Takeaways for the economy

Federal Reserve in its statement points out that since the September meeting, labor market has continued to strengthen and economic activity has been rising at a solid rate despite hurricane-related disruptions.

Chart: Unemployment rate

Source: US Bureau of Labor Statistics

Hurricane impact

The Fed pointed out that a series of hurricanes did have an immediate impact on payroll numbers and the inflation. But these effects are expected to be transient. The Fed states that hurricane-related disruptions would continue to affect economic activity, employment, and inflation in the near term, but past evidence suggests that these are unlikely to materially alter the course of the economy over the medium term.

Inflation on a 12-month basis is expected to remain below 2 percent in the near term but is expected to stabilise around the FOMC's 2 percent objective over the medium term. Having said that FOMC continues to mention that inflation developments need to be closely watched.

Source: US Bureau of Labor Statistics

New Fed chair – expected to be announced today

New Fed chair is expected to be announced today late evening. Of all the candidates, Jerome Powell’s name is doing the rounds. He is currently a Fed Governor (appointed in 2012) and has been seen as having views closer to Yellen on interest rate normalisation. From that perspective, a continuation of Yellen’s era of gradual increase in policy rates should be expected. Fed’s earlier projection indicates one more rate hike this calendar year and three rate hikes next year.

Jerome Powell, however, is seen relatively open to the idea of banking deregulation, one of the focus areas of the Trump administration. Other key options under evaluation are the reappointment of Yellen or the appointment of John Taylor. The latter is  particularly known for the famous Taylor rule (used as a guide for setting interest rate policy) and is expected to be relatively hawkish and in that sense some volatility in the financial market is possible if he gets appointed.

In case, Yellen does not get reappointed, she would be presiding over two more Fed meetings, including the crucial December meet, before her last day in office on February 3, 2018.

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