Economic Analysis - Fed Heading Towards An Uncertain 2018 - NOV 2017

BMI View: The US Federal Reserve's policy-setting Federal Open Market Committee (FOMC) is likely to look significantly different in six months ' time. With President Donald Trump appointing candidates to several vacancies on the Board of Governors, new faces at the member Federal Reserve banks, and potentially a new Fed chair , uncertainty over the direction of US monetary policy could rise significantly in 2018.

The unexpected resignation of FOMC Vice Chair Stanley Fischer from both his positions as the number two official and a governor on the Federal Reserve Board of Governors puts the leadership of the Fed increasingly in flux. President Donald Trump's opportunity to fill two additional vacancies on the board exacerbates this uncertainty. For now though, we maintain our base-case Fed funds rate forecasts ( see below) and expect a broadly centrist board to steer monetary policy from 2018 ( see ' Inflation Slowdown Reinforces Dovish Rates View ' , August 13).

We had thought that Fischer and Fed Chair Janet Yellen could have provided some stability to the FOMC over the coming years even if they left their top leadership posts by carrying out the remainder of their terms as governors. Their positions as vice chair and chair expire in June and February 2018, respectively, but their positions on the board of governors run until 2020 and 2024. However, Fischer's departure announced on September 6 and effective in mid-October and Yellen's address at the Jackson Hole conference in August, in which she made it clear she was at odds with President Donald Trump's financial deregulation ambitions, suggest that there will be significant change at the top in 2018. The uncertainty is only enhanced by an apparent falling-out between Trump and his top economic advisor, former investment banker Gary Cohn, who was once seen as the most likely successor to Yellen as Fed chair but is now reportedly out of favour with the president.

Hawkish Tilt In 2018 Would Surprise The Market
US - End-Year Fed Funds Forecasts, %
Current Fed funds rate is 1.16%. Source: Bloomberg Consensus, BMI

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