With the U.S. economy chugging along for many months, the Fed has been gradually easing off the stimulus it provides to the economy by raising interest rates to more normal levels. Yet so far the cost of lending has been slow to respond to the interest rate increases. But as the Fed continues with this policy, consumers who borrow to buy houses, cars, refrigerators and other items will have to pay more for those goods.
The central bank is also soon expected to introduce its plan to roll back its $4.5 trillion balance sheet it has accumulated since the recession, a change that could also help push up interest rates. Investors have expected the Fed to use the news conference after its September to announce a rollback plan.
In carefully worded statement that was nearly identical to the one released in June, the Fed suggested that it is keeping an eye on persistently low inflation and indicated that it would soon introduce its balance sheet plan. The Fed also said that it would maintain its existing policy of reinvesting the money it receives when the debt and securities it holds mature into new assets “for the time being.”
The central bank probably wants to begin this process before it could face a major leadership shake-up as Janet L. Yellen's position as chair expires early next year, said Scott Anderson, chief economist at Bank of the West.
In an interview with the Wall Street Journal on Tuesday, President Trump said he would consider reappointing Yellen as Fed chair when her term ends Feb. 3, but he also said that National Economic Council Director Gary Cohn was a candidate for the position.
Randy Quarles, a former treasury official whom Trump has picked for one of three empty spots on the Fed’s board, will go before the Senate Committee on Banking, Housing and Urban Affairs in a nomination hearing Thursday.
The Fed’s statement also gave a nod to persistently low inflation. It reiterated a line in the June statement that inflation measures were “running somewhat below 2 percent,” but it dropped the word “somewhat” this time. The central bank has a dual mandate of both ensuring a healthy job market and restraining inflation to a 2 percent target. But while job gains have been strong in recent months, inflation has continued to be weaker than the Fed’s goal.
The Fed has attributed this to temporary factors, like low oil prices and a re-pricing of cellphone plans. But inflation measures have dipped even further in recent months.
“I think the Fed will have a difficult time continuing to raise interest rates if inflation continues to undershoot the mark. So far, it hasn’t deterred them,” said Greg McBride, chief financial analyst at Bankrate.com. “But how much more can the Fed keep pushing rates higher if you’ve got inflation that is meaningfully below the 2 percent threshold?”
Anderson said there appears to be a disconnect between the Fed, which is forecasting three more rate hikes in 2018 and 2019, and the market, which is expecting one per year.
Stock markets continue to climb, with the Nasdaq and Standard & Poor's 500-stock index and Dow Jones industrial average hitting record highs by closing bell Wednesday.
Neither stocks nor bonds appear to reflect that rising interest rates could end up slowing the economy. “The markets could be a little too complacent right now,” said Anderson.