Up and Down Wall Street
Fed: What’s Certain vs. Merely Highly Probable
The FOMC confirmed an interest-rate increase could come in December. Powell is almost certainly the new Fed head.
By Randall W. Forsyth
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![](https://si.wsj.net/public/resources/images/ON-CI179_Powell_M_20171101175016.jpg)
Jerome Powell, governor of the U.S. Federal Reserve Zach Gibson/Bloomberg
The Federal Open Market Committee Wednesday confirmed the expectations of virtually everybody that another interest-rate increase is all but certain in December. The real question is, what then?
At this writing, two high-probability events lie ahead. President Donald Trump Thursday is expected to name Federal Reserve governor Jerome Powell to succeed Janet Yellen when her term as chair of the Fed’s Board of Governors expires in February. The Wall Street Journal reported late Wednesday that the White House has notified Powell of the president’s intention to nominate him, quoting a person familiar with the matter.
The FOMC also is highly likely to raise its key policy interest rate another quarter point at its next regularly scheduled meeting in mid-December. Federal-funds futures contracts place an 87.5% probability of a boost from the current 1%-1.25% target range next month, which is pretty close to a lock.
Once new leadership is in place at the Fed next year, however, the course of monetary policy is less certain. Based on the FOMC statement, which emphasized job gains have continued at “a solid rate despite hurricane-related disruptions,” it would appear the central bank would be on track for three additional quarter-point hikes in 2018, which the panel indicated in its “dot plot” for fed funds at the end of next year. For its part, fed-funds futures market is pricing in only one more increase in 2018 after the anticipated rise next month.
Given that Powell is seen as a consensus builder who is in the Yellen mold (but a Republican to satisfy a GOP-controlled White House and Congress), little deviation should be expected. That is, if the economy continues to progress at its steady pace with inflation under the Fed’s 2% target.
Indeed, Fed policy may be the least unknown unknown, to use the terminology of former Defense Secretary Donald Rumsfeld, the financial markets have to confront. At the same time, growth among economies around the globe is moving ahead in sync while inflation pressures, at least as measured in the widely watched indexes, are in check.
Far greater uncertainty looms on other fronts, most notably U.S. taxes. The House Ways and Means tax package was delayed a day until Thursday. Even once the tax-writing panel’s plan is out, there remains a long road through the Senate, as well as a likely conference after that, before a bill reaches the president’s desk. Health-care reform shows what an arduous path that can be.
Then there is the specter of global geopolitical conflict and the impact of internecine political fighting at home. None of which, however, has deterred the major market indexes, both in the U.S. and abroad, from climbing to records—even after a terror attack in New York City Tuesday.
Steady-as-she goes monetary policy from the Fed is one certainty in an uncertain world. The Fed may raise rates next month and next year, and shrink its balance sheet, but the markets are braced for it. The Treasury yield curve has narrowed to its flattest slope in a decade, with the spread in two-year versus 10-year notes down to 75 basis points, which implies the market has priced in higher short-term interest rates. The yield curve also is still positive, however, unlike the totally flat slope back in 2007, which portended a recession.
That’s not a worry these days, given the strong readings among consumers and traders alike.
But what was that saying about being fearful when others are greedy?
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