Economist's Insights

FOMC Upgrades Economic Assessment Keeping December Hike on Track

Nov 1, 2017

The FOMC voted unanimously to leave their target overnight rate range unchanged at 1.00-1.25%.  Despite a large number of words being changed in October’s Statement from the September Statement, the overall message remains largely the same but includes an important upgrade to the economic assessment.

The majority of the changes in the October Statement were related to the messaging regarding the hurricanes and their effect on the data.  The most material change was in the assessment of economic conditions.  September’s Statement that “economic activity has been rising moderately” was revised to say, “economic activity has been rising at a solid rate.”  As it relates to the labor market, the Statement notes the impact of the hurricanes on the September payroll report but dismisses it citing the drop in the unemployment rate.   As for inflation, the Statement notes the weaker-than-target inflation, going so far as to highlight the specific weakness in core prices, but then reaffirms that inflation is expected to “stabilize around the Committee’s 2 percent objective over the medium term.”  The balance of risks continues to be seen as “roughly balanced.”

Markets are generally unchanged immediately following the release of the Statement.  The 10-year Treasury yield is up 0.9 bp to 2.361% while the 2-year Treasury yield is up 0.4 bp to 1.608%.  The Dow is up 32 points and the Dollar is fractionally higher.  Fed Funds Futures contracts have gone from pricing in a 85% likelihood of a December rate hike to a 92% likelihood.  The FOMC’s December meeting will conclude on December 13.

While today’s policy Statement is an important reflection of what to expect at the December FOMC meeting, tomorrow’s scheduled announcement of the president’s selection to replace Chair Yellen in February looms even larger.  Expectations are that Fed Board Governor Jerome (Jay) Powell will be chosen.  If so, he would likely bring a certain amount of policy continuity to the Yellen-led FOMC.  However, Powell could eventually prove to be more dovish than Yellen, particularly given her more hawkish shift this year.  After so much speculation, it would be a hawkish surprise if Warsh or Taylor are chosen, likely yielding an abrupt market reaction.