Economist's Insights

FOMC to Begin Balance Sheet Adjustment in October; Lowers Longer-Run Fed Funds Projection

Sep 20, 2017

FOMC to Begin Balance Sheet Adjustment in October; Lowers Longer-Run Fed Funds Projection

The FOMC voted unanimously at its September meeting to leave its target Fed Funds rate range unchanged at 1.00-1.25%.  Additionally, the Committee voted, largely as-expected, to begin normalizing its balance sheet in October.  As detailed in their previously released balance sheet normalization plans, they will begin by letting up to $10 billion per month roll-off from their monthly cashflows – to be adjusted every three months.  In their Official Statement, the Committee made only minor changes to its language assessing economic activity and monetary policy.  They acknowledged better business investment.  They also highlighted that the recent hurricanes are expected to cause temporary disruptions in economic activity.  However, the Statement noted that “past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term.”

Bottom Line: The FOMC continues to see positive economic activity with improvement in business investment.  They still expect inflation to return to their 2% inflation objective over the medium term despite the recently weak readings.  Given the perceived economic stability, the Committee felt comfortable moving forward with its balance sheet reduction plans and continuing to project another rate hike in 2017 and three more in 2018.  However, their longer-run rate projections highlight their belief that this rate cycle will be much more shallow than previous cycles.

Immediately after the release of the FOMC’s decision, Treasury yields moved higher across the board with the 2-year yield up from 1.38% to 1.44% and the 10-year yield up from 2.23% to 2.28%.  Stock prices were lower and the Dollar rallied 0.6% in signs the market took the decision to be more hawkish than expected.