Fed Looks Ahead to December

Mike Sorohan msorohan@mba.org

November 02, 2017

December should be a busy month for the Federal Reserve. It will likely have a new chairman in place to replace Janet Yellen and it should be ready to raise the federal funds rate again.

But for now, the Fed runs in place. At the conclusion of its October policy meeting yesterday, the Federal Open Market Committee stayed the course yet again, declining to raise the federal funds rate--a move (or lack thereof) that Mortgage Bankers Association Chief Economist Michael Fratantoni said was clearly expected--and telegraphed.

"There was no drama surrounding this meeting of the FOMC," Fratantoni said. "The market is anticipating the next rate hike in December, and the Fed clearly signaled they agree with that expectation. The FOMC statement highlighted a ‘solid rate' of economic growth despite the impact from the hurricanes."

Fratantoni noted inflation remains low, but the tight job market is expected to cause inflationary pressures to increase over time. "The Fed's plan to begin to shrink their balance sheet is so far proceeding smoothly given their clear communication and the caps that prevent more than a relatively small amount of mortgage-backed securities and Treasuries to roll off each month."

President Trump yesterday signaled his intent to nominate Jerome Powell, currently a Fed governor, as chairman on Thursday. Fratantoni said MBA welcomed the nomination. "The Fed's goals of maintaining full employment, low inflation and financial stability are essential components of a healthy and dynamic housing finance system," he said. "Governor Powell brings substantial experience at the Fed, at Treasury and in the private sector to this critically important role. His work at the Fed through this challenging recovery should enable him to carefully guide monetary and regulatory policies in the years ahead in a manner that provides the environment for further, sustainable growth."

The full FOMC statement appears below (https://www.federalreserve.gov/newsevents/pressreleases/monetary20171101a.htm). Some paragraph breaks were inserted to break up copy:

"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. Although the hurricanes caused a drop in payroll employment in September, the unemployment rate declined further. Household spending has been expanding at a moderate rate, and growth in business fixed investment has picked up in recent quarters.

"Gasoline prices rose in the aftermath of the hurricanes, boosting overall inflation in September; however, inflation for items other than food and energy remained soft. On a 12-month basis, both inflation measures have declined this year and are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

"Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Hurricane-related disruptions and rebuilding will continue to affect economic activity, employment, and inflation in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term.

"Consequently, 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. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

"In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.

"In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

"The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. 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. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

"The balance sheet normalization program initiated in October 2017 is proceeding.

"Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Jerome H. Powell; and Randal K. Quarles."

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