Fed Preview: Stay the course and watch the economy

• The Fed Funds upper target rate will be unchanged at 2.25%
• A 25 basis point hike in December remains a high probability
• Focus will be on the description of the economy and inflation

FOMC

The Federal Open Market Committee (FOMC) will keep the Fed Funds target rate at 2.25% after Thursday's scheduled meeting of the central bank’s policy board. The next 0.25% increase to 2.5%  is expected at the December 19th meeting in line with the bank’s economic and policy projection materials issued in September.  The expected rate of at the end of this year was raised to 2.4% in the June materials from 2.1%.

The economy is growing strongly and inflation is in check. Gross domestic product expanded at a 3.23% annualized rate through the first three quarters with quarterly core PCE prices at 2%. Annual hourly wages increased 3.1% in October, the best gain in a decade. As Chairman Powell described in his press conference following the September meeting, these are the good times for the US economy.

The September FOMC statement said “…The labor market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong… and the unemployment rate has stayed low. Household spending and business fixed investment have grown strongly.”  Core inflation is near 2% and expectation are little changed. 

Thursday’s statement will be parsed for any meaningful changes from this description. Indications of an accelerating economy or rising inflation will tend to support the dollar and hints at a slowdown to undermine it. The Fed's concern with trade issues was noted in its last Beige Book prepared for this meeting.  

There has been public discussion from some Federal Reserve Governors recently on the neutral interest rate and whether the Fed Funds should be raised above that level. Markets are looking for signs that the Fed might be considering such a move.  It will also be interesting to see if Fed officials referenced the mid-term election and its potential for policy gridlock and  impact on the US economy or the equities decline in their talks.  It would be highly unusual for either discussion to be esclated to the FOMC statement. The minutes of this meeting which will be released in three weeks are the best place for such indications. 

Future Policy

Expectations for the course of Fed interest rate policy are set by the Projections Material that are issued four times a year and outline the banks suppositions for the future development of the US economy and concordant rate policy.

In the September materials the estimate for US economic growth was 3.1% in 2018 and 2.5% in 2019. The Fed Funds rate was projected at 2.4% at the end of this year and 3.1% next December which implies three 0.25% increases to 3.25%. The next projections are set for December. 

There is no press conference after this meeting.

Projection Materials - GDP, Inflation, Fed Funds

Monetary Policy, Fed Funds Target