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Fed Keeps Rates the Same; Will Begin Unwinding Assets in October

By NexChange
Capital Markets

The Federal Reserve announced on Wednesday that it would maintain the benchmark interest rate at its current 1 percent to 1.25 percent target and confirmed that it would begin to unwind its balance sheet from the economic stimulus program in October.

In its statement, the Federal Open Market Committee said it “will initiate the balance sheet normalization program” that it outlined in June. The $4.5-trillion balance sheet consists mainly of mortgage-back securities and Treasurys that the Fed acquired as part of its quantitative easing program during the financial crisis.

The Fed indicated that it will likely raise interest rates once more in 2017, but will have one fewer adjustment between now and 2019 than it had previously planned. As CNBC notes, the Fed will now likely raise the benchmark rate three times in 2018 and twice in 2019.

When measuring the health of employment and price stability, the FOMC said in its statement that it had taken into consideration the devastation on certain cities and communities from recent storms – including Hurricanes Harvey, Irma and Maria – and determined that while these storms will cause near-term economic problems, “past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term.”

Consequently, 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. Higher prices for gasoline and some other items in the aftermath of the hurricanes will likely boost inflation temporarily; apart from that effect, 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.

As for unwinding the assets from its balance sheet, “the Fed will allow $10 billion to roll off at first, increasing quarterly in $10 billion increments until the total hits $50 billion starting in October 2018,” as CNBC reports.

Photo: Public Domain

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