Fed meeting: 3 things to watch for in Yellen's statement

Gladys Abbott
September 23, 2017

Investors increased bets the U.S. Federal Reserve would raise rates again this year after the central bank's statement on Wednesday and were also assessing its decision to start reducing its roughly $4.2 trillion in U.S. Treasury bonds and mortgage-backed securities.

Hurricane's Harvey and Irma have left a slough of destruction in the wake, all of which will impact on economic growth and will favour a cheaper borrowing climate to rebuild, encouraging the Fed to stand still on rates.

Likewise, according to the Summary of Economic Projections the median forecast of the members of the Federal Reserve board and the presidents of the regional Fed banks was unchanged from their meeting in June, at 1.4%.

US central bankers are counting on steady growth and low unemployment to raise inflation closer to their goal, which would support their policy of gradual tightening through interest-rate increases and a reversal of quantitative easing.

While some analysts are looking ahead to interest rate projections for 2020, it is worth noting that it is unclear who will be leading the Fed at that time.

Analysts widely believed that inflation developments will determine the timing of next rate hike.

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In July, the core personal consumption expenditure (PCE) index, Fed's favor inflation indicator, rose only 1.4 percent year on year, below Fed's two percent target and also lower than the 1.9 percent in January. At present, the market has a 60% expectation of a rate hike in December.

With the rolloff of its holdings ready to start, Ms. Yellen said there is now "a somewhat high bar to resume reinvestments", and only "a material deterioration in the economic outlook" would prompt the Fed to consider such a move.

But Federal Reserve Chair Janet Yellen said she believes the U.S. economy is ready for less economic stimulus.

US benchmark West Texas Intermediate (WTI) crude futures CLc1 hit a four-month high of $50.79 per barrel and last traded at $50.71, flat from the USA close on Wednesday. But if inflation continues to undershoot it is hard to see the Fed following through on a hike. She said several factors have held inflation down: A job market still healing from the Great Recession, lower energy prices and a strong dollar, which has reduced the costs of imports. This marks the last leg of unwinding of QE programme which had quadrupled the balance sheet to United States dollars 4.5 trillion.

On oil markets, both main contracts dipped following an nearly 2% rally on Wednesday on data showing U.S. gasoline stockpiles had fallen to a 22-month low. If that were to happen, long-term rates might surge undesirably high, which could weigh on the economy.

The central bank also announced it would next month begin cutting back on its holdings of bonds and other assets built up as part of a scheme to keep rates low and steer the economy through the global financial crisis a decade ago. Prior to the 2008 financial crisis, the Fed's balance sheet totaled under $1 trillion. But economic growth and low unemployment of 4.4% are saying it should. The real step change may come next year, when changes in committee composition and the potential replacement of Janet Yellen as chair could mean that more hawks are in a position to impose their views.

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