First, let’s just get this out of the way: It’s almost a sure thing that the Federal Reserve will leave short-term interest rates alone this week.
But the meeting of central bank policymakers that ends Wednesday should still be a very interesting one.
Here’s why you should stay alert — and be ready to respond.
Balance sheet ballet
The Fed is widely expected to announce how it will start trimming its bulging balance sheet, an operation that could have an impact on long-term interest rates like mortgage rates.
In response to the financial crisis and Great Recession, the central bank bought up Treasury bonds and mortgage-backed securities in an unprecedented strategy to help keep those rates low and lift the economy out of the doldrums.
Now it’s time for the Fed to begin shrinking its more than $4 trillion in bond holdings. But instead of just selling fixed-income investments outright, officials will roll them off the Fed’s portfolio by not reinvesting some bonds as they mature. The process is expected to take years, given the massive holdings and given the Fed’s desire not to jolt financial markets.
And investors should keep their seat belts fastened and ignore any short-term market gyrations, while also keeping some funds in certificates of deposit and other safer investments.
Pay attention to what Fed policymakers have to say about hurricanes Harvey and Irma and whether the economic fallout could slow the pace of interest rate hikes.
While the economy is taking a near-term hit around some of the nation’s largest cities, including Miami, Houston and Jacksonville, Florida, the recovery from the storms and flooding has already begun.
From the Federal Reserve’s vantage point, temporary hiccups in the nation’s overall economic activity are to be expected.
Economist Joel Naroff of Naroff Economic Advisors says the chances are low that the hurricanes will blow the Fed off its rate-raising track.
“The recovery efforts and reconstruction, including the replacement of vehicles, will accelerate growth in the next three quarters,” he says. “Only the third (current) quarter will be hurt.”
The Fed has raised a benchmark short-term interest rate four times since late 2015. Economists have expected the next rate increase to come in December.
Fed leadership in transition
The Fed has been seen as a stable influence in recent years, but that could change. There are plenty of questions about the future composition of the Federal Reserve Board and its leadership.
Fed Vice Chair Stan Fischer recently announced that he’ll be leaving his post in mid-October for “personal reasons,” and Chair Janet Yellen’s first term ends early next year. Both were nominated by President Barack Obama.
Faced with whether to reappoint Yellen, President Donald Trump must decide if he wants to stick with the status quo or side with a nominee who shares his view that deregulation is needed. It’s reported that he is considering a variety of other candidates including his economic advisor, Gary Cohn. The Trump administration also must fill open board seats.
At her news conference following this week’s Fed meeting, Yellen will likely be asked again if she wants to stay on as chair. So far, she has been unclear about her plans.
Follow me on Twitter: @Hamrickisms