Federal Reserve Likely to Keep Interest Rates Steady


Federal Reserve officials are expected to keep interest rates steady at their two-day policy meeting that concludes Thursday. They will likely discuss the economy, financial markets and the future path of rates, among other topics.

This will be Fed Chairman Jerome Powell’s last meeting without a press conference afterward.

The central bank issues a policy statement at 2 p.m. ET, and officials aren’t releasing new economic projections.

Here’s a look at the main issues up for discussion:

The Economy

Employers have added jobs at a steady pace, likely firming Fed officials’ plans to raise rates in December. Their statement should again describe the labor market as strong.

On the other hand, the interest-rate sensitive housing sector is slowing amid rising mortgage rates. And business investment was surprisingly soft during the third quarter.

Officials’ September statement stopped describing rates as “accommodative,” or low enough to stimulate the economy. Mr. Powell said then that rates were still accommodative, but the language had grown stale because it no longer said anything meaningful about policy going forward.

The challenge ahead is to parse financial and economic developments to determine whether rates are edging closer to a neutral setting that neither spurs nor slows growth.

Financial Conditions

Don’t be surprised if the statement makes no mention of the recent selloff in stock and bond markets, which have tightened financial conditions since officials last met in September.

Fed officials haven’t signaled serious worries about recent market volatility or financial conditions more broadly. Quite the opposite: rising asset values earlier this year raised concerns about excesses and risk-taking in financial markets.

Drawing attention to changing market conditions would likely be interpreted by investors as indicating less urgency to raise rates further. The last time the Fed statement highlighted weakening market conditions, in late 2015 and early 2016, Fed officials slowed down their plans to raise short-term rates relative to earlier projections.

The IOER Sideshow

Some analysts have focused on a development in the run-up to this week’s meeting concerning movements in short-term money markets that have caused Fed officials’ benchmark federal-funds rate to drift closer to the top of its target range between 2% and 2.25%. When this happened in April, officials tweaked the way they set rates in June to keep them closer to the midpoint of the range.

The solution was to change the way they set the rate at the upper bound of the fed-funds range—the rate the Fed pays on excess reserves, or deposits, parked at the Fed by private banks, called IOER.

Until June, the Fed had lifted this rate by the same amount as the fed-funds rate—by 0.25 percentage point—each time it raised rates since late 2015. In June, it raised IOER by just 0.20 percentage point to keep the effective fed-funds rate closer to the middle of the its range.

Despite market speculation over a possible reduction in IOER at this week’s meeting, certain technical conditions for such a cut don’t appear to have been met. Moreover, cutting the IOER rate could create extra communications challenges, as it would come on the heels of Tuesday’s midterm elections and President Trump’s criticism of the central bank’s rate rises. In May, officials signaled they were more comfortable cutting the IOER rate, relative to the top of the fed-funds range, at a meeting when they were raising the fed-funds rate.

The Bond Portfolio

Fed officials think the upward pressure on their benchmark rate is coming from market developments unrelated to the gradual runoff of their bond portfolio, which dropped to around $4.1 trillion in October from $4.5 trillion a year earlier. The runoff is draining bank reserves from the system. At some point, this will probably put upward pressure on the fed-funds rate.

At the Fed’s July 31-Aug. 1 meeting, Mr. Powell signaled he would begin a debate at this week’s meeting about a broader question over how the Fed manages the fed-funds rate, which will help determine how long the runoff continues.

If they return to the approach used before the 2008 financial crisis, it would require fewer reserves and a small portfolio, meaning the runoff could continue well into the next decade. If they maintain the current framework, they would have more reserves and a larger portfolio, meaning the runoff might end in the next couple of years.

Roll Call

This week’s meeting will be the sixth since Mr. Powell became chairman, and he has yet to face any dissents. That streak should continue for now.

The nine-member rate-setting committee will have one new member this week, since it is the first meeting attended by new San Francisco Fed President Mary Daly. Kansas City Fed President Esther George had voted at the last two meetings as an alternate member covering for the vacancy in the San Francisco Fed presidency.

Write to Nick Timiraos at nick.timiraos@wsj.com



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