At the conclusion of its two-day gathering in Washington, the Fed announced that it would leave its benchmark interest rate unchanged in a range between 1 and 1.25 percent, after lifting it twice so far this year. The vote was unanimous, and the central bank did not alter any of the careful wording in its statement about its expected rate of future increases — a sign that it is not trying to quell widely held expectations of a rate increase of a quarter point in December.
“They’re on track to raise rates in December,” said Lewis Alexander, chief United States economist at Nomura Securities.
In its statement, the Fed said economic activity had been rising “at a solid rate despite hurricane-related disruptions.” It said that the hurricanes had caused a drop in payrolls in September and a pickup in inflation because of higher gasoline prices, but that it expected both effects to be temporary, and that the storms would be “unlikely to materially alter the course of the national economy over the medium term.”
The last time the Fed met, in September, large parts of the United States were still reeling from hurricanes that threatened to disrupt economic activity in several major cities. Two weeks later, the government reported that the economy had lost jobs in September for the first time in seven years, a decline most experts attributed to the storms’ impact.
Since then, however, economic data has indicated that the economy weathered the storms without lasting damage. Gross domestic product, the broadest measure of goods and services, rose at a 3 percent annual rate in the third quarter of the year, the second straight quarter of solid growth. Measures of retail sales and consumer confidence have likewise been strong, and most economists expect the next round of employment figures, due Friday, to show a solid rebound from September’s dip.
“Much of the uncertainty that had existed at the September meetings because of the hurricanes has subsided and signs are that growth has been stronger,” said Greg McBride, chief financial analyst for Bankrate.com.
The one sticking point remains inflation. The Fed’s preferred measure of inflation is well below the central bank’s 2 percent target; what’s more, inflation has slowed this year even as the unemployment rate has fallen, a trend that would ordinarily be expected to put upward pressure on prices. That disconnect has complicated the Fed’s plans to raise interest rates at the steady clip it has signaled, including three more times next year.
Ms. Yellen and most of her colleagues have expressed confidence that the slowdown in inflation is temporary and therefore should not force a change in plans. In a September speech, Ms. Yellen said that low unemployment is leading to pay increases, which will ultimately lead to higher prices as well; other Fed officials have made similar comments in recent weeks.
Still, at some point “temporary” effects stop looking so temporary. The Fed will get several more reports on inflation before its December meeting, and it remains possible that weak data could give policymakers pause.
Financial markets appear all but certain that the Fed plans to raise rates in December. Futures contracts on Wednesday morning suggested investors saw a 96.7 percent probability of a rate increase at the Fed’s next meeting, according to CME Group. Matthew Hornbach, global head of interest-rate strategy for Morgan Stanley, said the Fed had sent a clear signal that it was prepared to raise rates even if inflation stays low in the coming months.
But Ken Matheny, executive director of Macroeconomic Advisers by IHS Markit, was less certain that a December rise was inevitable. He said that the Fed was struggling to reconcile strong growth with weak inflation, and that policymakers would be watching coming inflation data closely in making their interest-rate decisions.
“A December rate hike is not a foregone conclusion,” Mr. Matheny said, adding that the market’s overwhelming confidence in an increase was “a puzzle.”
Policymakers and investors have also been watching closely for any signs that the Fed’s long-awaited process of drawing down on its $4.2 trillion balance sheet is disrupting financial markets. In 2013, interest rates spiked unexpectedly in response to the Fed’s announcement that it would begin slowing its bond purchases, a reaction that came to be known as the “taper tantrum.”
So far, there is little sign of trouble. Interest rates have edged up since the Fed announced its plans in September, but the stock market has continued to rise and there has been no hint of another tantrum. In a speech last month, Ms. Yellen said the asset-reduction process seemed to be going smoothly so far.
“I’m sure they’re very relieved at the reaction they got,” said Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics in Washington.
Investors said the nomination of Mr. Powell would mean that the Fed was likely to continue on its current course.
A former Treasury Department official under President George H.W. Bush and a partner at the Carlyle Group, a private equity firm, Mr. Powell emerged as the front-runner for the position in recent weeks from a diverse group of finalists. That group included Gary Cohn, a close economic adviser to the president; John B. Taylor, an economist who is a vocal critic of the Fed; and Ms. Yellen herself.
Mr. Trump has the opportunity to significantly reshape the Federal Reserve through appointments. Mr. Trump has appointed just one board member so far, the former Treasury official Randal K. Quarles, as the vice chairman for supervision, who voted for the first time on Wednesday.