The Federal Reserve steered a cautious path towards a further interest rate increase as soon as next month, as Janet Yellen spends what could be her final months as Fed chair balancing evidence of a resilient economy against doggedly weak inflation.

With Donald Trump expected to announce his nominee for Fed chair on Thursday, the central bank kept the key rate at 1 to 1.25 per cent at the end of the Federal Open Market Committee’s latest two-day meeting. The Fed continued to signal that “gradual” rate rises lie ahead, even if it did not offer any explicit indications as to when the next move will come.

While high petrol prices associated with the recent hurricanes had boosted some prices, “inflation for items other than food and energy remained soft,” the central bank said. On the upside, it noted that the labour market had continued to improve and “economic activity has been rising at a solid rate despite hurricane-related disruptions.”

Investors have been expecting a further quarter-point rate rise at the Fed’s final meeting of the year on December 12-13, but the direction of US monetary policy beyond that is about to be cast into a period of further uncertainty as the president considers installing a new Fed chair following the end of Ms Yellen’s first term in early February.

Administration officials expect Mr Trump to nominate Jay Powell, one of the Fed’s current governors, to take over the helm of the US central bank, although it remains possible that the president will change his mind at the last minute. Mr Powell would represent the continuity candidate for the Fed’s top job, given he hewed closely to Ms Yellen’s monetary policy approach in recent years.

The White House has suggested a decision on the Fed chair could come on Thursday. The expected change comes as a near-decade of loose monetary policy helps power a vigorous economic recovery — but one that is also coupled with surprisingly low inflation.

At a press briefing earlier on Tuesday, President Trump said Janet Yellen was excellent but did not say whether she would be his choice for Fed chair.

Ms Yellen has been presiding over a fierce debate within the Fed on how to reconcile the conflicting trends in the recovery. Unemployment has dropped to just 4.2 per cent despite the economic damage done by the recent hurricanes, and the US has now seen two straight quarters of roughly 3 per cent annualised growth. The global backdrop has become increasingly sunny.

Yet at the same time the Fed’s preferred measure of inflation, excluding food and energy, was just 1.3 per cent in September, following months of disappointing readings that have fostered concerns among some policymakers that entrenched factors are depressing prices following a half decade of sub-target price growth. The Fed stuck to its guns in expecting that inflation should stabilise around its 2 per cent objective in the medium-term. But it also noted that both its favoured inflation measures are running below target.

At the Fed’s September meeting many policymakers said they thought another rate rise would be needed later in the year, yet views were divided. Some officials insisted they wanted to see firmer evidence that inflation is heading back to the Fed’s 2 per cent target.

The Federal Reserve put one key element of its stimulus programme into reverse at the September meeting as it announced the gradual reduction of a balance sheet swelled to $4.5tn by quantitative easing — a well-telegraphed move that has not jolted markets.

However Ms Yellen has suggested the quantitative easing programme could well be needed when the US hits its next downturn — even if it is milder than the last one. That is because the Fed is not expecting to raise rates very far — perhaps to less than 3 per cent — leaving it with little rate-cutting firepower when the next recession happens.

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