The policymakers at the U.S. central bank decided to leave the target range for the federal funds rate (equivalent to the Bank of Canada overnight rate) unchanged at 1 to 1-1/4 percent, acknowledging that the stance of monetary policy remains accommodative.

This stance will allow the labour markets in the U.S., which are already very close to full employment, to continue to improve and return inflation, which has been below target, to a sustained level of 2 percent.

Unlike the Bank of Canada that has the single objective of 2 percent inflation, the Federal Reserve has two objectives–to maximize employment and 2 percent inflation. Historical data suggests that these two objectives are typically at odds–the higher the level of employment, the higher the level of inflation– so the Fed has a balancing act.

In recent history, however, inflation has remained well below target, despite the strong performance of the U.S. jobs market. The same is true in Canada. Inflation of goods and services has been held down by technological innovation, improved productivity and global competition.

Wage and salary inflation is also quite muted, especially in Canada. As well, inflation expectations are well anchored at low levels. In consequence, the economy has been able to move closer to full employment than in the past without triggering inflation, which is good news.

The policy-setting 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”.

 So, more rate hikes are ahead, but rates will rise gradually. Also, the Fed continues to unwind quantitative easing by selling bonds from its portfolio. This “balance sheet normalization program” was initiated in October 2017 and “is proceeding”.

Financial markets are interpreting the Fed’s statement as signaling that a December rate hike is on track, as the Fed acknowledged that: the economy is strong despite the hurricanes, the labour market has continued to strengthen, and it expects inflation to rise gradually. A December interest rate increase would be the third such move this year. The Fed has increased interest rates four times since late 2015, all of which happened at meetings that were accompanied by a press conference, which occurs at alternating meetings. There will be a press conference in December.

New Fed Chair

Of great interest is President Donald Trump’s nominee for the head of the central bank, a decision he is expected to announce tomorrow. According to many media outlets, the president is leaning toward picking Fed Governor Jerome “Jay” Powell, although he has been considering other candidates including the incumbent, Janet Yellen, whom he called “excellent”.

Powell, a Republican and former Treasury official, has supported Yellen’s policy of gradual rate increases, while calling for a modest rollback of post-crisis financial regulation. In more than 40 FOMC votes since becoming a governor in 2012, including this meeting, he has never dissented from the majority opinion.