(AP) — This week’s Federal Reserve policy meeting is shaping up to be an afterthought next to that other imminent Fed event of the week: President Donald Trump’s announcement of who will lead the central bank for the next four years.
With no policy changes expected from the Fed when its meeting ends Wednesday, investors are instead awaiting the news of Trump’s choice for Fed chair — and what it could mean for the direction of interest rates, and perhaps for the economy.
A senior administration official said Monday that Trump’s leading candidate is Jerome “Jay” Powell. This official, who spoke on condition of anonymity to discuss personnel deliberations, stressed that the decision isn’t yet final. Another official said the announcement is planned for Thursday.
Trump said last week in an interview that his decision had come down to two or three candidates. The finalists are thought to be Powell; Janet Yellen, the current Fed chair; and John Taylor, a Stanford University economist.
In Powell, Trump would be selecting a policymaker with a reputation as a moderate whose stance on interest rate increases would likely deviate little from Yellen’s cautious approach. Powell would, though, be expected to be marginally more favorable toward easing some of the stricter financial rules that were enacted after the 2008 financial crisis. Trump has complained that those rules have been too restrictive.
On Wednesday, when the Fed issues a statement after its meeting ends, it’s all but sure to keep rates unchanged. But it might issue a hint of what is widely expected: That it’s likely to raise rates modestly at its next meeting in December for the third time this year. Another rate hike would reflect the economy’s steady gains. It would also suggest that the Fed is confident that inflation will pick up and reach its 2 percent target rate relatively soon.
“Yellen and many of her colleagues believe that stronger economic growth will lead to higher wages and then higher inflation,” said Sung Won Sohn, an economics professor at California State University’s Martin Smith School of Business.
The problem with too-low inflation is that it can slow the economy by causing consumers to delay purchases if they think they can buy a product or service for a lower price later. And so far this year, inflation has actually been slowing. The trend that has raised doubts about whether, as the Fed has suggested, lower-than-optimal inflation reflects mainly temporary factors, such as a price war among cellphone service providers, or rather something more fundamental.
Last week, the government estimated that they economy grew at a solid 3 percent annual rate in the July-September quarter despite severe damage from two hurricanes. The economy has now posted two straight quarters of at least 3 percent annual growth — the strongest two-quarter stretch in three years.
And while job growth was disrupted in September by the hurricanes, the unemployment rate reached a 16-year low of 4.2 percent.
Those factors, along with a stock market setting record highs, are thought to have put the Fed on a path to raise rates modestly later this year and thereby avoid having to tighten credit more aggressively later to prevent high inflation — something that would risk derailing the economy.
The Fed has raised rates four times in incremental moves beginning in late 2015, after its benchmark rate had stood at a record low near zero for seven years. The rate is still historically low at a range of 1 percent to 1.25 percent.
If Trump chooses Powell to succeed Yellen, most analysts expect the Fed’s pace of rate hikes to remain gradual, with perhaps some possibility of a slight acceleration. Powell, who has been on the Fed board for five years, has been a reliable ally in Yellen’s go-slow policy on rate increases.
Many conservative members of Congress had been pushing Trump to select Taylor, rather than Powell, for Fed chairman. Taylor, one of the country’s leading academics in the area of Fed policy, would likely embrace a more “hawkish” approach — more inclined to raise rates to fight inflation than to keep rates low to support the job market. Taylor is the author of a widely cited policy rule that provides a mathematical formula for guiding rate decisions. By one version of that rule, rates would be at least double what they are now.
Yellen, who was selected as Fed chair by President Barack Obama, has been an outspoken advocate for the stricter financial regulations that took effect in 2010 to prevent another crisis. If Powell proves more inclined to ease some of those regulations, he would have an ally on the board in Randal Quarles, a Trump nominee who has joined the board as its first vice chairman for supervision, a position from which he can lead the effort to loosen regulations. The seven-member board has three other vacancies, thereby providing Trump with additional ways to put his imprint on the central bank.
Some Fed watchers had speculated that Trump might try to install both Powell and Taylor — one as Fed chair, the other as vice chair, a spot that is also open. But some economists said that might risk disunity on the board: Taylor has been critical of the looser-money policies that Yellen and her predecessor, Ben Bernanke, pursued and might break with Powell on the pace of rate hikes. That prospect could unnerve markets.
Diane Swonk, chief economist at DS Economics, said that whoever gets the top job will likely oversee a slight increase in the pace of rate increases.
“My guess,” she said, “is that the economic data will be a little stronger, and that will support more rate hikes next year.”