The Fed Balance Sheet Reduction is a Distraction From the REAL Crisis

Brunilde Fioravanti
Settembre 24, 2017

The Federal Reserve on Wednesday said it will hold short-term interest rates steady for the time being. Higher interest rates may be required to entice more private investors into the MBS market.

"The basic message here is US economic performance has been good", Yellen told reporters.

The Fed is committed to reducing bonds owned by them at a pace of about $10 billion per month, increasing the pace by approximately $10 billion for every three months to a maximum of $50 billion per month.

As the Fed prepares to begin paring the size of its $4.5 trillion balance sheet next month, it is expected that except India all the other major central banks would jump on to the bandwagon.

Federal Reserve Bank of San Francisco President John Williams said he expects "gradual rate increases" over the next couple of years, with one possibly as early as December. However, there was a possibility of another rate hike later this year, as 12 of the 16 officials on the Federal Open Market Committee forecasted an increase.

The Fed's policymaking committee approved its action on a 9-0 vote after ending its latest meeting. While the interest rate outlook for next year remained largely unchanged in the Fed's latest projections, with three rises envisioned in 2018, the USA central bank did slow the pace of anticipated monetary tightening expected thereafter.

The Fed's meeting sparked new hopes for another interest rate hike this year; this is an unusual move for them as they kept quiet for a very long time.

Analysts believe the initial impact on the mortgage industry will be small, but as the Fed steps up the reduction, it could create some rate volatility.

"To our minds we saw few surprises in today's Fed communications", Page added. The growth rate started to fall off but again rose to 6.9 percent in the first quarter of this year. That's the point at which its benchmark rate is considered to be neither stimulating economic growth nor restraining it. The most recent increase took place in June.

Nicholas Wall, portfolio manager of the Old Mutual Strategic Absolute Return Bond fund, said the move should not derail the economy: "This was widely expected; the Fed had wanted to get the process of balance sheet reduction underway before its composition changes next year".

Unemployment has declined and stood at 4.4 percent in August, which is below the Fed's estimate for the level consistent with price stability over the longer run. But it remains at a relatively high level, which means rate hikes have had limited impact on it. However, a dovish new board member was said to have opposed the decision.

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