Daily Management Review

Fed Set To Give More Detail On Balance Sheet Winddown And Raise Interest Rates


06/13/2017




Fed Set To Give More Detail On Balance Sheet Winddown And Raise Interest Rates
The U.S. Federal Reserve may provide more detail on its plans to shrink the mammoth bond portfolio it amassed to nurse the economic recovery and due to a tightening labor market, it is widely expected to raise its benchmark interest rate this week.
 
"The expectation of a rate hike...is widely held, and has been reinforced by the most recent round of Fed communications," said Michael Feroli, an economist with J.P. Morgan.
 
The Fed raising its benchmark rate to a target range of 1.00 to 1.25 percent this week is overwhelmingly seen by economists polled by Reuters.
 
In December 2015, after more than a decade, the Fed embarked on its first tightening cycle. The second nudge upwards this year following a similar move in March would be a quarter percentage point interest rate rise on Wednesday.
 
Since 2015 end, economic growth appears to have reaccelerated following a lackluster first quarter and the unemployment rate has fallen to a 16-year low of 4.3 percent.
 
However, more mixed results have been shown by other indicators of the economy's health. Investors are growing increasingly doubtful policymakers will be able to stick to their anticipated pace of tightening of three interest rate rises this year and next and the Fed's preferred measure of underlying inflation has retreated to 1.5 percent from 1.8 percent earlier in 2017.
 
With campaign promises on tax reform, financial regulation rollbacks and infrastructure spending either still on the drawing board or facing hurdles in Congress, there are also growing doubts on the size and scope of fiscal stimulus the Trump administration may inject into the U.S. economy.
 
In addition to their expected rate hike path, when they release their latest set of quarterly projections on growth, unemployment and inflation, Fed policymakers' confidence in their outlook will be on show on Wednesday.
 
Although the extent of jitters on inflation moving away from the Fed's 2 percent goal will likely be reflected at an individual level, few economists expect major changes in the Fed's overall forecasts this time around.
 
However, about its previously announced plan to reduce this year its $4.2 trillion portfolio of Treasury debt and mortgage-backed securities, markets are increasingly anxious for the Fed to give a clearer steer on the timing and details. In order to help keep rates low and bolster the economy, those securities were purchased in the wake of the financial crisis.
 
"If the Fed is serious about reducing the size of its balance sheet this year and wishes to communicate those plans well in advance, it is running out of time to do so," said Michael Pearce, an economist with Capital Economics.
 
During Yellen's press conference or as part of the policy statement, more detail could come. To flag up a plan that would feature halting reinvestments of ever-larger amounts of maturing securities, the central bank used the minutes of its last policy meeting.
 
The amount of securities allowed to fall off the balance sheet every month would be set according to a preset limit under the proposal. And to allow deeper cuts to its holdings, every three months the Fed would raise the limits even though initially, the cap would be set at a low level.
 
(Source:www.reuters.com) 






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