WASHINGTON: With a possible change of leadership looming, the US Federal Reserve on Wednesday upgraded its view of economic growth, and downplayed the impact of two summer hurricanes.
Overshadowed by President Donald Trump’s planned announcement Thursday of his pick to lead the central bank starting next year, the Fed stuck to the expected course, holding its benchmark lending rate unchanged at 1.0 to 1.25 percent.
But the closely-scrutinized statement following the two-day meeting on monetary policy offered a single word that markets read as a signal the expected rate hike in December is on track.
Already seen as a near certainty, a December move would be the third increase this year, and only the fifth since the end of the global financial crisis, a move to head off inflation which remains a distant threat.
The Fed’s policy-setting Federal Open Market Committee upgraded its outlook by altering one word, saying economic activity has been rising at a “solid” rate, rather than “moderately” as it was described in September.
“In one line: Growth assessment upgraded; rates to rise next month,” Ian Shepherdson of Pantheon Macroeconomics said in an analysis, in an opinion shared by most economists.
Mickey Levy of Berenberg Capital Markets said the “clear upgrade” on growth “virtually locked in a rate hike at the December FOMC meeting.”
Downplaying hurricane impact
While the FOMC acknowledged the back-to-back summer hurricanes in the South — Harvey in Texas and Irma in Florida — will continue to have an impact on economic activity, employment and prices, those disruptions will be short-lived.
The statement said “past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term.”
Chris Low of FTN Financial described the Fed’s analysis: “Weakness is explained away by one offs. Strength is real. Never mind that the strength in this case was also hurricane related as an army of workers flocked to Houston for the post-Harvey cleanup.”
Increased gasoline prices in the wake of the Harvey, which hit the key oil-producing region of Houston, Texas, fueled overall monthly inflation.
But even with that impact, US price measures “have declined this year and are running below 2 percent,” and expected to remain so for some time, the Fed said.
The mystery of continued low inflation has kept the Fed on hold most of the year, even as growth has strengthened and job creation has continued unabated, pushing the unemployment rate down to 4.2 percent in September.
Trump Fed nomination looms
Having got the decision they expected and not much else to ponder, markets will now focus squarely on the White House announcement due Thursday afternoon.
While Trump on Wednesday praised as “excellent” current Fed Chair Janet Yellen — whose term at the helm of the central bank expires in early February — he stopped short of committing to reappointing her.
Media reports indicate Trump has settled on current Fed Governor Jerome Powell to replace Yellen.
Powell, an attorney and former investment banker, has emerged as a consensus choice, who will provide some continuity to soothe markets but allow Trump to put his own mark on the central bank.
As the Fed’s sole hold-over Republican from the previous administration but also a moderate on inflation, Powell is seen as amenable to Trump’s deregulation agenda but unlikely to pursue a sharp course of interest rate hikes.
Replacing Yellen would make Trump the first president since Jimmy Carter not to renominate the Fed chair inherited from the previous administration.
Yellen has presided over the Fed’s cautious exit from the era of aggressive stimulus and easy money to lift the economy out of the Great Recession of 2007-2010, raising rates just four times since 2015.