With Fed Statement, ‘A New Course’
The chances of another Federal Reserve rate hike yesterday seemed like a non-starter. But now, the Fed appears ready to finally start winding down its enormous securities portfolio, possibly starting in September.
The Federal Open Market Committee, as expected, left the federal funds rate untouched yesterday following its two-day policy meeting. The news from the meeting, however, came as the FOMC statement (https://www.federalreserve.gov/newsevents/pressreleases/monetary20170726a.htm) gave notice that it intends to begin its long-anticipated wind-down of its securities portfolio sooner than later.
“For the time being, the Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction,” The FOMC statement said. “The Committee expects to begin implementing its balance sheet normalization program relatively soon, provided that the economy evolves broadly as anticipated
Mike Fratantoni, chief economist with the Mortgage Bankers Association, said with this pronouncement, the Fed “is embarking on a new course.”
“Having given the market plenty of notice that they would begin shrinking their balance sheet holdings of Treasuries and [mortgage-backed securities] this year, following their July meeting, they have now indicated their intention to slow reinvestments in their securities portfolio ‘relatively soon,'” Fratantoni said. “Read that as a signal that they will likely announce at their September meeting that they will begin tapering reinvestments in October.”
Fratantoni noted economic conditions support the wind-down. “The job market is tight,” he said. “Many employers are finding it increasingly challenging to fill open positions. And yet wage growth and price inflation remain low. We agree with the Fed’s expectation that inflation will increase later this year and into next, and this will prompt further increases in the Fed’s short-term target, with the next hike most likely coming in December.”
The full FOMC statement appears below. A few paragraph breaks have been added for clarity.
“Information received since the Federal Open Market Committee met in June indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have been solid, on average, since the beginning of the year, and the unemployment rate has declined. Household spending and business fixed investment have continued to expand. On a 12-month basis, overall inflation and the measure excluding food and energy prices have declined and are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
“Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.
“In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.
“In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
“The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
“For the time being, the Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee expects to begin implementing its balance sheet normalization program relatively soon, provided that the economy evolves broadly as anticipated; this program is described in the June 2017 Addendum to the Committee’s Policy Normalization Principles and Plans.
“Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Patrick Harker; Robert S. Kaplan; Neel Kashkari; and Jerome H. Powell.”
