Fed Stands Pat On Rates, Will Reduce Balance Sheet In October

For years, the central bank piled up purchases of Treasury and mortgage-backed securities, a strategy meant to stimulate the economy by reducing borrowing costs for everyone. Many analysts expect the Fed to announce plans to unwind its $4.5 trillion balance sheet at the conclusion of its meeting on Wednesday.

The Fed releases those predictions in a chart that includes a dot for each of the members at their target interest rate level for each time period.

Trading on Wall Street had been mostly subdued this week ahead of the Fed’s announcement.

By paring its holdings the Fed may make it harder to acquire highly sought after bonds and reduce liquidity in the funding markets, sparking greater market volatility and making it more expensive to short Treasuries. Instead of reinvesting all the proceeds of its massive bond portfolio, the Fed will allow $10 billion to roll off at first, increasing quarterly in $10 billion increments until the total his $50 billion starting in October 2018.

The prevailing caution in markets ahead of the Fed has kept some investors from making sharper adjustments to their positions despite potentially higher tensions over the Korean peninsula following hawkish statements from U.S. President Donald Trump overnight.

Investors will be closely watching the U.S. central bank as its policymakers deal with the fallout from hurricanes Harvey and Irma, which hammered the country and are expected to hit economic growth.

Fed Chair Janet Yellen has said the process will be gradual.

However, 12-month inflation is still expected to remain below the Fed’s two percent goal in the near term, stabilizing at the target rate only in the medium term. Hurricanes Harvey, Irma, and Maria have devastated many communities, inflicting severe hardship.

However, the central bank said the economic impact of the storm is likely to be felt only in the near term.

Political uncertainty also made a surprise appearance after sources said that the Japanese Prime Minister Shinzo Abe was considering calling a snap election for as early as next month to take advantage of his improved approval ratings and disarray in the main opposition party.

The Fed has telegraphed its move for months, and investors are thought to be prepared for it.

The Fed has always held a portfolio of financial assets, mostly USA treasuries, to help it manage short-term interest rates. The program pushed the Fed’s balance sheet from just under $1 trillion to $4.5 trillion in bonds and other securities. Job gains have remained solid in recent months, and the unemployment rate has stayed low. Through management of short-term interest rates and the availability and cost of credit, it seeks to manipulate spending, investment, employment and inflation to foster economic growth.

“I think that they will still on average lean toward hiking in December”, he told AFP, noting there are a “sufficient number” of officials who believe low inflation is due to temporary factors. “It’s for political reasons”, Willem Buiter, Citigroup’s global chief economist, said at New York University’s Stern School of Business this month. It has raised them four times since the end of 2016. “This could come in multiple forms such as the Fed’s economic projections, statement and also Fed chair Yellen’s testimony”. But Cohn appears to have fallen out of favor. In a press conference, Yellen described it as something of a mystery.