The Fed's 'out of control' balance sheet is a major threat

Carla Harmon
September 24, 2017

The United States Federal Reserve kept its benchmark interest rate unchanged yesterday and announced the gradual end to a crisis-era stimulus programme in a sign the economy is on sound footing. "This matters to investors in bonds as it effects how you invest in them and the returns you can expect to get from that asset class in the future".

Looking ahead, Canada wholesale sales for July, Eurozone flash consumer sentiment for September, U.S. weekly jobless claims for the week ended September 16, house price index for July and leading indicators for August are set for release in the NY session.

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.

The Fed also said it will begin to unwind its $4.5 trillion balance sheet in October.

The median dot plot continued to project one more rate hike this year, followed by three more increases in 2018.

On top of that, the devastation caused by recent severe hurricanes could make it hard for Fed policymakers to get a solid read on the economy in the coming weeks as they decide whether to enact another small hike in a key interest rate.

USA central bankers are counting on steady growth and low unemployment to raise inflation closer to their goal, which would support their policy of gradual tightening through interest-rate increases and a reversal of quantitative easing.

Yellen also shared that the Fed expects that the overall US economy will continue to expand at a moderate pace over the next few years.

Since 2015, the Fed has raised rates four times by a quarter percentage point, after keeping interest rates close to zero for seven years. She also predicted the US economy would suffer a notable degree of short-term damage from the impact of Hurricanes Irma, Harvey and Maria.

The Fed has already signaled the economy is strong enough to absorb higher short-term rates. "Beyond December, policy is even more uncertain as we wait to see who Trump appoints to the Fed".

The Fed did lower its projection for its so-called neutral rate. "I think the overall view that we would be raising rates gradually over the next two years and getting back to a normal level is the one I think I have a lot more confidence in".

On the economic front, the National Association of Realtors said on Wednesday that existing home sales decreased 1.7 per cent to a seasonally adjusted annual rate of 5.35 million units last month. As a result, financial markets have seemed unsure about whether the Fed would raise rates again before year's end.

"Looking ahead, it is important to remember that there is potential for a very different Board of Governors next year after Janet Yellen's term expires this coming February", Dye said.

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