The Fed decided to hold off on a rate hike at its fifth FOMC meeting of the year. This was widely expected. Before the meeting, most believed the Fed would keep to its rate forecast with one more rate hike this year. A rate hike at the Fed’s December meeting is thought to be the most likely time. Today’s policy statement didn’t include anything to change these expectations. There had been concerns that the Fed may change its language to acknowledge weaker inflation which could reduce the chance of another rate hike in December. That change didn’t occur. The Fed appears to still consider the low inflation as only a short-term issue. So a December Fed rate hike still appears likely although the odds as indicated by the Fed funds futures did decline a bit from yesterday. According to the CME FedWatch Tool, the odds declined from 54.3% to 49.7%.
The Fed also decided to hold off on balance sheet normalization program. That’s the program in which Fed will start reducing their bond holdings. The Fed was expected to start this at its September meeting. This appears likely based on this sentence from today’s policy statement:
The Committee expects to begin implementing its balance sheet normalization program relatively soon, provided that the economy evolves broadly as anticipated.
All FOMC voting members voted in favor of the policy action. No one dissented.
There are three vacancies at the seven-member Board of Governors, which are the permanent voting members on the FOMC. One nomination has been made to fill one of those three spots. On July 10th, President Trump nominated Randal Quarles, a former Treasury official and private equity investor, to fill the position of Vice Chairman for Bank Supervision on the Federal Reserve Board of Governors. Quarles co-authored a 2016 WSJ op-ed which criticized the Fed for keeping rates too low for too long. So it appears he would be more of an inflation hawk.
Janet Yellen’s term as Fed Chair will be expire in early 2018, and there has long been speculation about whether President Trump will reappoint her for another term. Before the election, a new Fed Chair in 2018 looked like a sure thing if Trump became President. That’s far from a sure thing now. In an interview Tuesday with the Wall Street Journal, President Trump said:
I like her; I like her demeanor. I think she’s done a good job. [...] I’d like to see rates stay low. She’s historically been a low-interest-rate person.
President Trump also said his National Economic Council Director, Gary Cohn, is under consideration for the Fed Chair nomination. According to this Washington Post article, “Cohn's views on monetary policy are less well known than his views on banking regulation.”
Deposit Account Strategies
This is another reminder that Fed rate hikes will be gradual, at best. We have finally started to see deposit rates rise in the last few months, but the increases have been small. Several internet banks have been raising their savings account rates, but most of the increases are only 5 and 10 basis points. We may not see too many more increases until we see another Fed rate hike.
CD rates have also been rising, but in the last few months, most of the increases have been on shorter-term CDs with terms of 2-years and under. This is making long-term CDs less appealing. It still appears like we’ll see internet banks offering 2% 1-year CDs before we see them offering 3% 5-year CDs.
Even with the stagnant long-term CD rates, I’m still hesitant to give up on long-term CDs such as those with 5-year terms. We have been disappointed too many times in the past with the promise of rate hikes. As is always the case, if you decide on 5-year CDs, it’s always best to choose those with early withdrawal penalties of six months’ interest or less.
For more strategy discussion, please see my article from January, Deposit Account Strategies for 2017.
Future FOMC Meetings
The next three FOMC meetings are scheduled for September 19-20, October/November 31-1 and December 12-13. The September and December meetings will include the summary of economic projections and a press conference by Fed Chair Yellen.