The Federal Reserve will probably maintain its interest rates

The central bank publishes a policy statement at 2 pm AND, and officials do not publish new economic projections.

Here is an overview of the main topics of discussion:

L & # 39; s economy

Employers added jobs at a brisk pace, likely confirming Fed officials' intentions to increase rates in December. Their statement should again describe the labor market as strong.

On the other hand, the housing sector sensitive to interest rates is slowing in the face of rising mortgage rates. And business investment was surprisingly weak in the third quarter.

The September statement of officials stopped describing rates as "accommodating" or low enough to stimulate the economy. Powell said the rates were still accommodating, but the wording had become obsolete because he was not saying anything meaningful about the policy.

The next challenge is to analyze financial and economic developments to determine whether rates are close to a neutral parameter that neither stimulates nor slows growth.

Financial conditions

Do not be surprised if the statement does not mention the recent sale on the stock and bond markets, which have tightened the financial conditions since the last meeting of the managers in September.

Fed officials have not raised serious concerns about recent market volatility or financial conditions in general. On the contrary: the rise in asset value at the beginning of the year raised concerns about excesses and risk taking on the financial markets.

Drawing attention to changing market conditions would probably be interpreted by investors as indicating less urgency to raise rates further. The last time the Fed's statement revealed a weakening of market conditions in late 2015 and early 2016, Fed officials had slowed their plans for short-term rate hikes over previous expectations.

The Sideshow IOER

Some analysts have focused on the developments on the eve of this week's meeting regarding short-term money market movements that have brought the key rate of federal funds closer to the top of its target range between 2% and 2.25. %. When that happened in April, officials changed the way they set rates in June to keep them closer to the mid-point of the range.

The solution was to change the way they set the rate at the upper limit of the range of federal funds – the rate that the Fed pays on excess reserves, or deposits, parked at home by private banks, called IOER.

Until June, the Fed had raised this rate by the same amount as the federal funds rate – by 0.25 percentage points – to each rate increase since the end of 2015. In June, it had increased the rate effective exchange rate of 0.20 point only funds are closer to the middle of its range.

Despite market speculation about a possible reduction of IOER at this week's meeting, some technical conditions for such a reduction do not seem to have been met. In addition, the reduction in IOER's rate could create additional communication problems, as it would come shortly after Tuesday's midterm elections and President Trump's criticisms of the bank's rate hikes. Central. In May, officials said they were more comfortable with lowering the IOER rate relative to the top of the federal funds range, during a meeting over the past year. from which they increased the rate of federal funds.

The bond portfolio

Fed officials believe the upward pressure on their benchmark rate comes from market developments, unrelated to the gradual runoff of their bond portfolio, which dropped to about $ 4.1 trillion in October, against 4,500 billion the previous year. The runoff drain the bank reserves of the system. At some point this will probably put upward pressure on the federal funds rate.

Fed July 31 – August At the first meeting, Mr. Powell said he would begin a debate at this week's meeting on a broader issue of how the Fed manages the federal funds rate, which which will help determine the duration of the runoff.

If they went back to the approach used before the 2008 financial crisis, it would require fewer reserves and a smaller portfolio, which means that runoff could continue for a good part of the next decade. If they maintained the current framework, they would have more reserves and a larger portfolio, which means that runoff could end in the next two years.

Call

This week's meeting will be the sixth since Powell became president and has not been dissented. This series should continue for the moment.

The nine-member pricing committee will have a new member this week as the first meeting will be attended by the new San Francisco Fed President, Mary Daly. Kansas City Fed President Esther George had voted at the last two meetings as a substitute member covering the vacancy in the San Francisco Fed presidency.

Write to Nick Timiraos at [email protected]