Fed set to hold rates steady ahead of Trump's leadership decision

WASHINGTON- 1 November 2017:The Federal Reserve is expected to keep interest rates unchanged on Wednesday as speculation swirls on who will be its next leader, but the U.S. central bank will likely point to a firming economy as it edges closer to a possible rate rise next month.

The Fed has raised rates twice since January and currently forecasts one more hike by the end of the year as part of a tightening cycle that began in late 2015.

Investors have all but ruled out a move at the end of this week’s two-day policy meeting. The Fed is due to issue its latest policy statement at 2 p.m. EDT (1800 GMT).

Markets will look to it for confirmation the central bank is on track for a December rate hike, though attention will quickly turn to who will be in charge of monetary policy at the end of Fed Chair Janet Yellen’s first term in February 2018.

President Donald Trump, who has interviewed Yellen, Fed Governor Jerome Powell and three others for the top Fed job, is likely to announce the nomination on Thursday.

Powell, a soft-spoken centrist who has supported Yellen’s gradual approach to raising rates, is seen as having a lock on the position.

“The bottom line is the meeting is probably going to be a somewhat boring event for markets, overshadowed by the expected Fed chair decision,” said Torsten Slok, chief international economist for Deutsche Bank.

INFLATION WORRIES

Fed policymakers have been buoyed in recent months by a strengthening U.S. economy and further tightening in the labor market, although inflation has continued to remain below the central bank’s 2 percent target.

The economy unexpectedly maintained a brisk pace of growth in the third quarter, increasing at a 3.0 percent annual rate, the Commerce Department reported last week.

A decline in hiring in September also has largely been dismissed as a blip caused by the temporary displacement of workers due to Hurricanes Harvey and Irma. That jobs report also showed wages growing at an encouraging pace and the unemployment rate falling to more than a 16-1/2-year low of 4.2 percent.

A strong rebound in job gains is anticipated when the Labor Department releases its October nonfarm payrolls report on Friday.

Inflation is the main concern for Fed policymakers who are wondering about the causes and duration of the current weakness. The Fed’s preferred measure of inflation sits at 1.3 percent after retreating further from target for much of the year.

Nevertheless, Yellen and other key policymakers have said the Fed, which unveiled a plan this year to cut its balance sheet starting in October, still expects to continue to gradually raise rates given the economy’s strength. That is not expected to change on Wednesday.

“If we get what we expect to get, which is basically more of the same of what we saw in the September statement,” said Sam Bullard, a senior economist at Wells Fargo, “then yes, their gradual policy tightening plan is in place and all signs point to a December hike.”