Fed keeps rates unchanged

Talking points:

- FOMC holds benchmark interest rate in range of 1.00-1.25%, as was expected by markets (Fed funds futures were pricing in a 0% chance pre-meeting).

• Near-term Fed interest rate glide path remains unchanged from June 2017: another hike is expected in December, and three more are anticipated in 2018; markets only pricing in one hike for 2018 per Fed funds futures contracts.
•  The Fed already has raised rates twice this year as part of a program for a slow but steady normalization of monetary policy.
•  Despite the efforts to tighten policy, economic conditions have remained loose and the stock market continues to rally.

The Federal Reserve declined to raise interest rates at its policy meeting this week and said the late-summer hurricanes likely will not have much longer-term impact on overall economic activity.

"There's no signal from today's meeting that there's any risk that December has been altered," said Michael Arone, chief investment strategist at State Street Global Advisors. "With the economy growing at roughly 3 percent, with unemployment at 4.2 percent, with very easy monetary conditions and a modest uptick in inflation expectations, everything leads me to believe that they'll be raising rates in December."

This was the second meeting since Hurricanes Harvey and Irma caused record-breaking damage that nonetheless has had only spotty impacts on macro data.

Nonfarm payrolls, for instance, declined in September by 33,000, but the committee said those kinds of effects will pass. Gross domestic product, on the other hand, grew 3 percent in the third quarter, according to an initial government estimate that was ahead of Wall Street forecasts.

The Fed already has raised rates twice this year as part of a program for a slow but steady normalization of monetary policy. In addition to the rate hikes, the Fed in October began the process of gradually reducing its $4.5 trillion balance sheet, which mostly contains bonds the central bank purchased to stimulate the economy by lowering mortgage rates and steering investors to risk assets like stocks and corporate bonds.

Nevertheless, Yellen and some other key policymakers have said the Fed still expects to continue to gradually raise rates given the strength of the overall economy. In its statement, the central bank reiterated it expects inflation to rise back to its target over the medium term and emphasized that the unemployment rate has declined further.

New Fed Governor Randal Quarles, Trump’s first appointee to the central bank, voted at this week’s policy meeting. The Republican president could fill at least three more open vacancies on the Fed’s seven-member board in the coming months.

The central bank is scheduled to hold its final policy meeting of the year on Dec. 12-13.

Who Will The New Fed Chair Be?

President Donald Trump is expected on Thursday to nominate Jerome Powell as the next head of the Federal Reserve, putting his own stamp on the leadership of the U.S. central bank while signaling continuity on monetary policy.

Trump’s decision, scheduled for Thursday afternoon, concludes a months-long process in which he considered five finalists, including current Fed Chair Janet Yellen, before settling on Powell who has served as a Fed governor since 2012.

Earlier this year, Daniel Tarullo resigned. And just a little over a month ago, Stanley Fischer, a longtime central banker, resigned from Fed Board of Governors. In their place, Donald Trump has nominated Randal Quarles, a monetary hawk who favors a rule-based approach to monetary policy, as vice chair for bank supervision. Unfortunately, transcripts of Mr. Quarles views on monetary policy are not readily available, so he is not included in the quantitative analysis.