The Federal Open Market Committee (FOMC) kept its key policy rates unchanged by maintaining the Fed Funds target at 1 percent – 1.25 percent.
The FOMC statement reads: “The labor market has continued to strengthen … economic activity has been rising at a solid rate despite hurricane-related disruptions. The Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee's 2 percent objective over the medium term ... 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 … The balance sheet normalization program initiated in October 2017 is proceeding.”
So, the stage is definitively set for a fed funds rate hike in December while rate hikes should continue towards the 2 percent zone by the end of 2018.
This is important for investors as we’ll see, among other things, mortgage rates becoming somewhat more expensive and savings accounts paying slightly higher rates over the course of 2018.
As of yesterday, November 1, the Treasury yield curve was as follows: 2-year at 1.61 percent, 5-year at 2.01 percent and 10-year at 2.37 percent. These yields will, under normal circumstances, go up further in 2018, of course not dramatically, which will cause impacts on a whole range of investment vehicles in the United States as well as all over the globe and more specifically in the emerging economies.
That said, on Wednesday afternoon the media started to report that President Trump will nominate today Jerome Powell (born February 4, 1953) who is a member of the Federal Reserve Board of Governors since May 25, 2012, as the next Fed Chair.
Mr. Powell worked at the Treasury between 1990 and 1993 and in 1992, during his stint at the Treasury, Powell oversaw the investigation and sanctioning of Salomon Brothers.
Meanwhile, there has been nothing on the Trump twitter feed that there were authoritative leaks to the media that Powel will be nominated today to replace Yellen as Chair of the Federal Reserve.
The Senate does have to confirm the appointment if the leaks are accurate, but leaks from the Trump White House normally are accurate.
Powel represents a continuity of policy. Powel has experience at the Fed and a flexibility of approach that makes this appointment more appropriate than some of the other candidates.
An interesting question is now raised: “Does Yellen go?”
Yellen’s position as Fed Chair expires next year, but Yellen’s position as a Governor of the Federal Reserve has another 10 years to run. It is conceivable that Yellen simply stays put as a powerful Federal Reserve Governor. Concerns about Fed independence would be a reason to remain.
If Yellen would choose to resign as Governor when leaving the role of Chair, that would mean that President Trump would be able to nominate 4 new members of the Committee in total.
Besides all that, today we also get U.S. unit labor costs and productivity data. Productivity is the bit of the economy that economists cannot explain, but that does attract an awful lot of attention.
One reason to look at productivity is because it has a bearing on the trend rate of growth.
Trend growth in an economy is simply the trend of labor force growth plus the trend of productivity growth.
President Trump has said that it would be easy to achieve around 4 percent trend growth in the States. U.S. growth has come in at around 2.25 percent so far during his presidency.
To achieve 4 percent trend growth in the absence of mass emigration, which seems unlikely, a productivity miracle would be necessary. Signs of a productivity miracle have been lacking.
Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.
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