The Federal Reserve’s Federal Open Market Committee (FOMC) said Wednesday at the conclusion of its two-day meeting it will not raise interest rates – for now.
But the Fed suggested another rate hike is possible when it meets again in December.
“Economic activity has been rising moderately so far this year," Fed Chair Janet Yellen said. "We think the economy is performing well. We are working down our balance sheet because we feel stimulus is no longer needed.”
Questions about Yellen’s long-term status were unaddressed. Her term as Fed chair expires in February, and President Donald Trump has not said if he plans to reappoint her, only that he has not made a decision yet.
“I have said that I intend to serve out my term as chair and that I'm really not going to comment on my intentions beyond that,” Yellen said.
In the years following the 2008 financial crisis, the Fed followed a quantitative easing policy in which it bought Treasury and mortgage securities to boost economic growth. It ended that policy in 2014 but kept the balance sheet high, reinvesting the revenue from maturing bonds.
Starting next month, the FOMC will “reduce its $4.5 trillion balance by $10 billion a month, gradually rising over the next year to $50 billion a month,” CBS News reported.
“The Fed made a historic move of announcing the balance sheet normalization plan,” said Brett Pacific, senior managing director of derivatives and quantitative strategy at Sun Life Investment Management, “but the focus of the market is not on this move.
“The FOMC statement is a bit more hawkish than the market expected. The Fed acknowledged the improvement of business investment while dismissing the concerns of economic drags by hurricanes. Instead, the Fed pointed out that hurricanes likely boost inflation temporarily. Overall, there is no additional concern of low inflation/expectation compared to the July statement.”
John Engle, president of Chicago-area family office merchant bank Almington Capital, said, “With President Trump yet to show his hand with regard to future leadership of the Federal Reserve, including a number of senior vacancies other than the chairmanship, the direction of monetary policy in the months and years ahead remains unclear, which is disconcerting.”
Engle continued, “With interest rates still low and a crowded balance sheet, the Fed has a lot less firepower at its disposal than it did during the last crisis. The current economic expansion has been one of the longest in decades as well as one of the slowest. If the economy begins to lose steam before the Fed can lift rates and clear its books sufficiently, we would face a difficult position indeed."
“That said, given the mixed economic data and question marks surrounding the economic impact of Hurricanes Harvey and Irma, today's statement of cautious optimism is fitting.”
“The Fed has fired the starting gun on withdrawing its quantitative easing program,” said James McCann, Boston-based senior global economist for U.K.-based Aberdeen Standard Investments. “This is set to be a marathon rather than a sprint, with a slow-but-steady runoff in Treasury and mortgage-backed security holdings to begin in October. This step reflects rising confidence that the recovery is sufficiently durable to withstand a slow withdrawal of emergency policy measures, a full 10 years after the financial crisis struck.”
Brian Rhonemus, CEO of Columbus, Ohio-based Sanford Rose Associates-Rhonemus Group, said his clients are more interested in regulatory impact than rate policy.
“The regulatory burden in conjunction with current rate policy creates an uphill battle for many of our clients,” Rhonemus said. “This will continue as a drag on small business growth and small business lending, which fuels community banking growth. Our bank clients retained us to hire teams away from their competitors vs. a one-off addition to staff. This creates a huge splash in the market for the winner of these successful commercial and mortgage teams.”
McCann concluded that “the Fed will struggle to deliver a full 100bps in interest rate hikes by the end of next year. Instead we expect three moves, with inflation likely to remain frustratingly sluggish. Moreover, the reduction in the Fed’s balance sheet alongside a tapering in ECB asset purchases may well tighten financial and monetary conditions more than the central bank anticipates. To compensate for this balance sheet effect, with the runoff not data dependent, the short-term interest rate will be the tool that takes the slack. Even if we see this slower trajectory, markets are still not pricing enough at the short end of the yield curve and are likely to have to continue to adjust over the period.”
