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The Federal Open Market Committee (FOMC) held its short-term interest rate steady on November 1 and made only minimal changes to its regular policy statement. These actions were widely expected. The FOMC continues to believe that “gradual increases in the federal funds rate” are likely to be needed but that the extent and timing of such increases will depend on how the economy evolves.
A key puzzle remains the unexpected drop in core measures of inflation earlier this year despite solid economic growth and a strong job market. It is not clear to what extent the decline reflects factors such as the drop in mobile phone charges that may not recur. The core personal consumption expenditure (PCE) price index rose 1.3 percent at an annual rate in the most recent (third) quarter from one quarter earlier. This reflects a notable recovery from a 0.9 percent increase in the second quarter, but it remains below the 1.8 percent pace in the first quarter and the Fed’s 2 percent target. By the time of the December FOMC meeting, we will have information on October PCE prices and October and November consumer price index prices. If these data do not show at least some further recovery in inflation, the Fed may well postpone its next rate increase. Financial markets appear to believe a December increase is a near certainty, setting themselves up for a shock if the inflation data disappoint. I think it is likely that inflation will continue to rebound and that the Fed will raise rates in December, but I believe there is roughly a one-in-three chance that inflation will stay low and perhaps a one-in-four chance the Fed will stay put in December.
The big Fed news this week is likely to occur on November 2, when President Trump is expected to announce his pick for the next Fed chair. The heavy favorite is Jerome Powell, already serving as a member of the Fed’s board of governors. Stay tuned.
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