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FOMC Announces the Unwinding of its Balance Sheet

FOMC Meeting

As expected, the FOMC announced the unwinding of its $4.5 trillion balance sheet beginning in October. There is no change to the funds rate which stays at a range of 1.00 to 1.25 percent. For unwinding, the committee is holding to its June statement that will allocate rollover amounts across maturities based on the proportions it holds. Unwinding, which will take several years to unfold, will begin gradually at $6 billion cap (limit) for treasuries and $4 billion for mortgage backed securities. The caps will increase in three month intervals by $6 billion for treasuries and $4 billion for mortgage backed securities until they reach $30 billion per month for the former and $20 billion for the latter. The economic assessment is also steady with job growth said to be continuing and economic growth activity described as moderate. Temporary hurricane effects are cited and include a rise for gasoline prices though the inflation outlook remains unchanged running below their 2 percent goal. Quarterly FOMC forecasts continue to see one more rate hike this year, with median projections unchanged for 2017 and 2018 at three 25 basis point hikes penciled in each year, to 1.4 and 2.1 percent respectively. There is a change to 2019 which is trimmed back to a median 2.7 percent from 2.9 percent with the long run call cut back two tenths to 2.8 percent. Median projections for 2017 GDP growth are up 2 tenths to 2.4 percent with GDP seen slowing to 2.1 percent next year followed by 2.0 in 2019 and 1.8 percent in 2020. The unemployment rate is unchanged from June forecasts at 4.3 percent this year with 2018 and 2019 each cut one tenth to 4.1 percent. Core PCE inflation is cut 2 tenths this year to 1.5 percent and 1 tenth next year to 1.9 percent. The core is seen at 2.0 percent in both 2019 and 2020.

Fed Chair Press Conference

Janet Yellen repeated that this year’s down draft in inflation is likely temporary, the result of one-time factors. She expects inflation to move higher and stabilize around the FOMC’s 2 percent goal, though she did say there are risks that inflation may continue to run below 2 percent. Yet, citing history, she said tightness in the labor market tends to push up wages over time and with that price inflation along with it. On balance sheet unwinding which is set to begin next month, she does not see any adjustments outside of the scheduled path. Yet should the economy significantly deteriorate, she said that the FOMC could change reinvestment caps, stop rolloffs or resume reinvestment. On employment she was pleased with progress and describes the 4.4 percent level as “quite low” and notes special progress among minorities who were hit hardest after the financial crisis.

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