Dec rate hike on cards, US economy on track: Key takeaways of the Fed meet

The Fed has raised rates twice this year and currently forecast another nudge upwards by the end of 2017

As was widely expected move, the US Federal Reserve on Wednesday decided to keep interest rates unchanged and pointed out that the US economic growth was solid and labour market was strengthening. Also, it played down the impact of the recent hurricanes, an indication that the Fed is set to lift interest rates again in December.

The Fed has raised rates twice this year and currently forecast another nudge upwards in its benchmark lending rate from its current target range of 1% to 1.25% by the end of 2017. The central bank is scheduled to hold its final policy meeting of the year on December 12-13.

Here are the key takeaways from the Federal Open Market Committee (FOMC) meeting:

1) Jerome Powell to replace Yellen? 

More than the Fed policy action, attention was largely focused on who would be in charge of monetary policy at the end of Fed Chair Janet Yellen’s term in February 2018. A few media reports claimed the US President Donald Trump is expected to pick Federal Reserve Governor Jerome Powell to replace Yellen at the helm of the central bank. 

2) December rate hike on cards

The FOMC statement suggested the US Fed looks set to raise borrowing cost in its December policy meeting as Fed officials upgraded their assessment of the US economy.  

“The labor market has continued to strengthen and ... economic activity has been rising at a solid rate despite hurricane-related disruptions,” the Fed’s rate-setting committee said in a statement after its unanimous policy decision.

Meanwhile, federal fund futures put the odds of a December rate hike at about 98%, according to CME Group’s FedWatch program.

3) On balance sheet reduction

The Fed only briefly updated about its plans to shrink its swollen balance sheet. The central bank reiterated that it was proceeding with the reduction of its $4.2 trillion in holdings of Treasury bonds and mortgage-backed securities, a process which began in October. Squeezing the balance sheet by ending the bond-buying programme tightens monetary policy as the move reduces demand from the bond market.

4) On US economy

The Fed acknowledged that near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

"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,"the FOMC statement said. 

"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% in the near term but to stabilise around the Committee's 2% objective over the medium term," the statement added. 

5) New appointment

The Federal Reserve Board announced that James A Clouse has been appointed secretary of the FOMC, succeeding Brian F Madigan, effective November 26. In addition to directing the work of the FOMC Secretariat, which produces minutes and transcripts of FOMC meetings, Clouse will continue as deputy director of the Board's Division of Monetary Affairs.