As we expected, the FOMC dropped a big hint in today’s FOMC statement that implementation of the Fed’s balance sheet normalization plan will take place “relatively soon.” I take that to mean an announcement at the next FOMC meeting on Sept. 20, with asset reductions beginning in October.
The FOMC helped the market digest the news of balance sheet normalization by softening the language on inflation, which the bond and fed funds futures markets took to mean a lower probability of additional rate hikes this year and into 2018.
The July FOMC statement replaced the language that inflation was running “somewhat below” 2% with more downbeat language that inflation was running “below” 2%. While clearly a nod to more dovish FOMC members like Neel Kashkari, who dissented with the majority at the last FOMC meeting, I don’t see this as a material change in the FOMC thinking around the inflation outlook or rate-hike outlook, for that matter. The statement kept the language on the outlook for inflation intact.
Fed funds futures now puts only a 38.5% probability of another interest rate hike from the Fed by December. It appears the markets see balance sheet normalization and fed funds rate hikes as substitutes rather than complements today. A higher probability of balance sheet reduction means a lower probability of further rate hikes from the Fed. I am not so sure that is the way the FOMC is thinking about this impending action; I still think the FOMC sees the two monetary policy actions — balance sheet normalization and Fed rate hikes — as compliments that are not inherently mutually exclusive. Stocks and Treasury bonds rallied on the news, and the U.S. dollar weakened to 14-month lows.
On the economy, the statement slightly upgraded the assessment of the labor market, noting that job gains have been solid, while household spending and business investment continued to expand.Read More ›
The second estimate for Q1 GDP growth didn’t do much to alter the original view that the U.S. economy got off to a rough start this year.Read More ›
Beyond this quarter, the economic and policy outlooks are becoming cloudy again.Read More ›
There were few surprises in today’s Federal Open Market Committee (FOMC) decision and statement to hold the fed funds target rate at between 0.50 and 0.75%.Read More ›
The FOMC statement released along with the decision today lays the necessary groundwork for a December rate hike decision.Read More ›