Here's How Markets Are Reacting to the Fed Policy Meeting

Cornelia Mascio
Settembre 22, 2017

That figure would inch up by $10 billion each quarter until it reaches $50 billion in monthly reductions a year from now. How will it affect market interest rates, and the USA dollar? A decision on interest rates is also on the line.

The Fed projects a 2.4% growth in the economy this year, which is a marked improvement over last year, and they expect unemployment to continue dropping down to 4.1% next year.

Reducing the massive balance sheet is not without risks.

"It is too soon for the committee to conclude that the recent slowing in inflation was sufficiently permanent to alter the Fed's plans", economists at Barclays wrote in a note to clients.

If balance sheet expansion led to asset price inflation [bearish for gold], balance sheet taper could lead to asset price deflation [positive for gold].

Given how concerned some officials had been about inflation, there was clearly some money looking for a more dovish Fed than we saw.

"The basic message here is USA economic performance has been good", Chairwoman Janet Yellen said in a press conference after Fed officials concluded a two-day meeting.

Yellen's tenure as chairwoman expires in February, and President Trump is still considering whether to retain or replace her. The Standard & Poor's 500 index of stocks has risen just 0.08 percent ahead of the Fed announcement at 2 p.m. A critical question is whether the Fed has grown troubled or confused about chronically low inflation.

After the 2008 financial crisis and ensuing recession, the Fed took the unprecedented step of beefing up its holdings of government bonds and mortgage-related securities from $900 billion to $4.5 trillion in an effort to turn the economy around.

Besides, and nearly unnoticed by markets, Fed balance sheet reduction has already and very gradually been taking place through United States commercial banks, which have reduced their excess reserves by roughly Dollars 500 billion since 2014. The Fed stopped buying new bonds in 2014 but kept its balance sheet high by reinvesting the proceeds of maturing bonds. After leaving its benchmark rate at a record low for seven years after the 2008 crisis, the Fed has modestly raised the rate four times since December 2015 to a still-low range of 1 percent to 1.25 percent. At this rate, the Fed's balance sheet would still be above $3 trillion by late 2019.

Yellen can expect to be asked, again, about whether she's discussed her future with President Donald Trump, after it emerged that she had breakfast with his daughter Ivanka in July.

In other words, inflation is signaling that the Fed should not increase rates. Presidential economic adviser Gary Cohn, a prior favorite for Fed chair, appears to be on the outs with the president after criticizing the administration's response to violence from white supremacists in August in Charlottesville, Virginia.

But the Fed has yet to achieve its other objective of stabilizing prices at a 2 percent annual rate. The move will gradually increase long-term borrowing rates.

At her news conference, Yellen declined to say whether she would like to serve a second term.

Earlier this month, the bank's second in-command, Stanley Fischer, announced he will depart on October 13. So far, Trump has moved to fill only one spot, nominating Randal Quarles, who has yet to be confirmed by the Senate, to the key post of vice chairman for bank supervision.

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