In a Nutshell: “No funds rate hike but more hints that the balance sheet reductions are coming.â€
Rate Decision: Fed funds rate range maintained at 1.00% and 1.25%
The FOMC members came to Washington with not much expected and they did pretty much what was expected: They kept the funds rate at 1.00% to 1.25% and signaled that it was the time to reduce the balance sheet was near. As for the details of the statement, the view of the economy was largely the same as it was in June. Everything is solid or expanding. Inflation is now ‘running below 2 percent†rather than “running somewhat below 2 percentâ€. In other words, not much of a change. There hasn’t been a lot of data since the June 14-15 meeting, so there was little reason to change the outlook.
What everyone was looking for was a signal on when the Fed might start shrinking its balance sheet. The Committee stated: “For the time being (emphasis added), the Committee is maintaining its existing policy of reinvesting principal payments from its holdingsâ€. It then added: “The Committee expects to begin implementing its balance sheet normalization program relatively soon (emphasis added)â€. In other words, the signal was sent to the markets that the there will be some reduction in the balance sheet sometime this year.
Okay, what should we make of this? First, expect the Fed to announce that the balance sheet adjustment will begin either at the September or November meeting. As for the funds rate, it is not likely to be increased at the September meeting unless the economy picks up steam and inflation, especially wage inflation, accelerates. If it is not hiked in September, expect the next move to come the meeting after the announcement of the balance sheet reduction. My guess: Nothing in September, November 2nd for the balance sheet move and December 13 for the next rate hike. That is also likely to be Fed Chair Yellen’s last meeting, so she will exit at the end of January with the interest rate and balance sheet normalization under way.
(The next FOMC meeting is September 19-20, 2017.)