The FOMC meeting of October 27-28 ended much as expected with no change in the fed funds target rate of 3.75 to 4.00 percent. Although the statement did not exactly provide forward guidance, the emphasis remained on the FOMC’s commitment to bringing “elevated” inflation back to the Fed’s 2 percent objective. With two voters dissenting – Cleveland President Beth Hammack and Governor Lisa Cook – it is clear that a substantial minority on the FOMC thinks a hike in rates was already needed to subdue the current energy-led inflation. By the time the December 8-9 FOMC meeting rolls around, it should be clearer if past higher costs for energy continue to feed into current upward price pressures and see where the FOMC consensus falls. The market certainly expects a 25 basis point move by then.
Fed Chair Kevin Warsh did not add a lot to the bare statement from the FOMC in his press briefing on Wednesday. He said the “resilient” US economy is weathering a period of uncertainty with ongoing moderate growth and that the labor market continues to see low firing and payroll growth. Warsh declined to call financial conditions tight, but he said they are moving in the direction of being consistent with “achieving a longer, more durable period of economic growth and price stability.”
The real news in Warsh’s press briefing was his announcement to change the FOMC meeting schedule beginning next fall. Beginning in 2027, there will be eight meetings in the year, but one will be reserved for discussions of “broad monetary policy strategy” with no vote on rates. In 2028, there will be eight meetings with two reserved for policy strategy discussions so only six occasions with policy votes scheduled.
While this sounds like a big departure, it is not without precedent at the Fed. Back in February 2009 when the financial crisis and Great Recession were inescapably present, the FOMC switched to all meetings being two days to allow more time for policy discussions. This changed the previous routine of alternating one-day and two-meetings on the schedule and was never changed back. This is also not dissimilar to what a few other major central banks do. It should be noted that fewer policy setting meetings in a year does not limit the FOMC capacity to make a rate move during an intermeeting period. While it is preferable for rate setting to take place in the context of a regularly scheduled meeting, the FOMC can hold conference calls should there be a compelling reason to raise or lower rates.
The advance estimate of third quarter GDP shows growth continuing at a moderate pace of 3.4 percent after increases of 2.2 percent in the second quarter and 2.5 percent in the first quarter. Growth in the third quarter was buoyed by strong personal consumption and fixed investment. However, there are a few points of caution in the details.
Personal consumption increases were almost certainly related to upward price pressures. Spending on durables was a normal up 2.3 percent in the third quarter after the jump of 7.4 percent in the second quarter. However, nondurables spending likely reflects higher prices for energy with an increase of 3.4 percent in the third quarter, an escalation from up 3.1 percent in the second quarter and up 0.3 percent in the first quarter.
Fixed investment rose 9.4 percent in the third quarter after up 7.7 percent in the second quarter and up 6.1 percent in the first quarter. Nonresidential fixed investment accelerated 12.7 percent in the third quarter after already strong increase of 9.0 percent and 9.9 percent in the second and first quarters, respectively. Residential fixed investment was down 3.3 percent in the third quarter after rising 2.8 percent in the second quarter and dipping 7.6 percent in the first quarter. Business are investing in structures at up 5.4 percent and equipment at up 20.9 percent in the third quarter. At least some of this comes from the rush to build data centers. In the short term this will lift GDP but the backlash from the public, investors, and some parts of government will likely slow this in coming quarters.
