The Fed feels like the calm eye in the middle of the Trump administration storm

  • The Federal Reserve left interest rates unchanged—a welcome calm amid the Trump administration hurricane and tweet storm.
  • The Fed is betting on further improvement on the economy ahead.
  • The most dramatic part of the Fed statement was about the Fed being on track to begin winding down its $4.5 trillion balance sheet soon.
  • The big question is: Will Trump let Janet Yellen stay on as Fed chair or will he seek to replace her?

Federal Reserve Board Chairwoman Janet Yellen
Getty Images
Federal Reserve Board Chairwoman Janet Yellen

Hunkered down in a Washington immersed in political drama, the Federal Reserve's latest no-drama decision to stand pat on interest rates feels like the calm eye in the midst of the Trump administration hurricane and Twitter storms.

Drawing upon an economic backdrop that is seen as mostly favorable, Fed Chair Janet Yellen and her Federal Open Market Committee colleagues are betting on further improvement ahead.

In the official statement, the FOMC acknowledged that it is failing to hit its own target saying inflation "is expected to remain somewhat below 2 percent in the near term." The Fed's favorite inflation gauge, the Core Personal Expenditures index, is up just 1.4 percent over the past year.

On the other hand, the policy-making body says "job gains have been solid" since the beginning of the year. Employers added 222,000 jobs in June while the unemployment rate stood at 4.4 percent. Underscoring a persistently disappointing aspect of the years-long economic expansion, average hourly earnings were up 2.5 percent over the past year. That's well-shy of more substantial wage growth seen in previous recoveries.

The Fed has raised benchmark interest rates twice so far this year and earlier signaled that another rate hike could come before the end of this year. Investors and many economists are more cautious, however, noting the lack of inflation.

Balance sheet plans

More dramatic is word that the Fed is on track to begin winding down its $4.5 trillion balance sheet "relatively soon." This is the reversal of so-called quantitative easing, or the purchases of assets begun in November 2008, aimed at stabilizing a U.S. economy then in crisis.

Yellen has said the upcoming unwinding should not be market-rattling, or will be more like "watching paint dry" as she told reporters in June. By contrast, JPMorgan Chase CEO Jamie Dimon said recently that balance sheet tightening "could be a little more disruptive than people think."

Even with the steady-as-she-goes approach on rates, the Fed undoubtedly discussed behind closed doors what it publicly describes as "policy uncertainty," a subtle and non-judgmental nod to the high growth aspirations of the Trump administration which has generated more controversy than output-enhancing legislation six months into its term. We'll find out more about that debate among the central bankers when the fairly-sanitized meeting minutes are released in a few weeks, where individuals are not named but referred to only as "participants."

As the International Monetary Fund noted recently, expectations for the U.S. economy are muted, and even downgraded somewhat, over the next year or so. The smart money is not doubling down on the notion of passage of legislation which could give the economy a boost, such as tax reform and increased spending on roads, bridges, highways and mass transit.

Who'll run the Fed?

Yellen, whose term as Fed chair is up next year, knows her leadership position is among the uncertainties continuing to swirl. Trump said recently in an interview that he's considering re-nominating her, adding that he'd "like to see rates stay low."

What makes the process even more awkward is that the head of the president's National Economic Council, Gary Cohn is also seen as a candidate. Yet he's also said to be the person guiding the decision.

Because this July meeting didn't include a news conference or updated summary of economic projections, Yellen was able to avoid having to comment more specifically to reporters about the tumult in Washington and the risks facing the economy. Her next opportunity (and challenge) to do all of that looms after the next meeting in September.

Commentary by Mark Hamrick, senior economic analyst and the Washington bureau chief for He was recently named president of the Society of American Business Editors and Writers (SABEW), a leading organization of business journalists. Follow Mark Hamrick on Twitter @hamrickisms.

For more insight from CNBC contributors, follow @CNBCopinion on Twitter.