The Daily Update - Fed

The President Trump nominated board of governors at the Federal Reserve continues to take shape with a further nomination last night of Marvin Goodfriend a professor at Carnegie Mellon University and a widely respected economist. He will join, if approved by the Senate, Jerome Powell who takes over the chair when Janet Yellen leaves office in February and Randal Quarles the vice chair of supervision. That will still leave two vacancies on the Board of seven governors and a third becomes available with Yellen's departure.

Goodfriend has often criticised the Fed board’s decisions over the last few years and was an outspoken critic of QE under Bernanke. He also, in a congressional sub-committee testimony in March, spoke about “the Fed’s failure to secure the credibility of its inflation target” and elaborated on the risks created. It is thought he will be a key member of the committee with his economics background as Powell the next chair does not hold a Ph.D. in economics. On interest rates he said earlier in the year, “The circumstances that have depressed long-term real interest rates are not likely to dissipate any time soon,” adding “If the globe gets into recession in the near future, the zero interest problem might make a comeback, and I think central banks should be prepared and not presumptuous.” He is also reported as arguing that the Fed should be as vigilant in guarding against deflation as it is in combatting excessive inflation.

We continue to monitor activity around the Fed, however, it does appear that the new members will look to follow the same trajectory as the current incumbents in regard to the Fed funds target rates. We still expect a further hike at the 13th December meeting taking the upper band to 1.5%. However, our view differs in regards to rate hikes in 2018, we believe the four rate increases currently priced in will be overkill for an economy which remains a little lethargic in certain areas, despite over eight years of expansion in the current cycle, and we do not believe the inflation outlook will justify such actions.

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