US' interest rate policy remains on course despite temporary shocks from hurricanes

Andrew Cummings
September 22, 2017

The Fed's statement increased the expectations of one more interest rate hike by the end of 2017 and boosted the United States dollar. "They also revised down their forecast of future inflation".

It has, however, left unchanged its growth forecast for next year (+2.1 per cent), as well as its projection of unemployment (at 4.3 %) and inflation (+1.6 percent) to 2017.

The S&P's financial sector rose after the news as banks benefit from higher rates, while rate-sensitive utilities fell.

The market started this week with strong sentiment amid the improved global market sentiment. Under existing conditions, the Fed's balance sheet will decrease by $300 billion to $4.2 trillion.


"For much of the past decade, the Fed has been the largest investor in mortgages in the world", said Mortgage Bankers Association Chief Economist Mike Fratantoni.

Other markets, however, are acting like this is a policy mistake.

According to Perpetual's Matthew Sherwood, if the assets sales go ahead as planned the Fed's balance sheet will reduce from its current US$3.5 trillion to US$3 trillion in three years' time. So, the Fed is doing it very slowly and carefully.

"You just had that little momentum spurt after it went through 2,500 but it is kind of running out of steam and is going to bide its time until Wednesday, when they listen to Janet" said Ken Polcari, director of the NYSE floor division at O'Neil Securities in NY.


Unigestion investment manager Olivier Marciot, approved of the clarity in the Fed's meeting minutes: "As expected, the Fed left rates unchanged tonight but finally provided clearer details on how it will start unwinding its huge balance sheet".

The question of when and how the Fed will manipulate its main policy lever - its target for short-term interest rates - in coming months is less clear.

The Fed has felt confident to raise rates because it appears to have met one of its key mandates: maximizing employment. Ten-year bond rates are essentially the same as they were two years ago, despite the progress in economic measures over the past 24 months. "Investors are likely to look past the Fed's interest rate decision and even the plan to shrink the Fed's balance sheet, focusing primarily upon the Fed's forward guidance", said Jingyi Pan, a market strategist at IG in Singapore. But inflation is still running below the Fed's 2 percent target. Now that the economy has recovered enough, the Fed needs to sell a lot of that back.


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