Economic Flash

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

by Craig Dismuke, Dudley Carter

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.”


In the Summary of Economic Projections, participants collectively projected a slower rate path.  While the median rate forecast for YE17 and YE18 remained 1.375% and 2.125% respectively, the average rate forecast dropped for 2017, 2018, 2019, and the longer run.  Additionally, the median Fed Funds rate projection for year-end 2019 dropped from 2.94% to 2.69% and the median longer-run rate was dropped from 3.00% to 2.75%.  Expectations for GDP growth in 2017 were revised up from 2.2% to 2.4% but longer-run growth is still projected to be 1.8%.  Projections for the unemployment rate were revised lower in 2018 and 2019 from 4.2% to 4.1%.  Core inflation expectations were also marked lower from 1.7% to 1.5% for YE17 and from 2.0% to 1.9% for YE18.   However, longer run inflation is still expected to run at 2.0%.


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.  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.

FOMC Official Statement

Dated September 20, 2017


Information received since the Federal Open Market Committee met in July indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have remained solid in recent months, and the unemployment rate has stayed low. Household spending has been expanding at a moderate rate, and growth in business fixed investment has picked up in recent quarters. On a 12-month basis, overall inflation and the measure excluding food and energy prices have declined this year 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. Hurricanes Harvey, Irma, and Maria have devastated many communities, inflicting severe hardship. Storm-related disruptions and rebuilding will affect economic activity in the near term, but 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. 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.


In October, the Committee will initiate the balance sheet normalization program 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.


Implementation Note issued September 20, 2017

The information included herein has been obtained from sources deemed reliable, but it is not in any way guaranteed, and it, together with any opinions expressed, is subject to change at any time. Any and all details offered in this publication are preliminary and are therefore subject to change at any time. This has been prepared for general information purposes only and does not consider the specific investment objectives, financial situation and particular needs of any individual or institution. This information is, by its very nature, incomplete and specifically lacks information critical to making final investment decisions. Investors should seek financial advice as to the appropriateness of investing in any securities or investment strategies mentioned or recommended. The accuracy of the financial projections is dependent on the occurrence of future events which cannot be assured; therefore, the actual results achieved during the projection period may vary from the projections. The firm may have positions, long or short, in any or all securities mentioned. Member FINRA/SIPC.
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