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--Median FFR Unchgd for '17, '18; 11 Mbrs See 1 More Hike This Yr
--Longer Run Fed Funds Rate Falls to 2.8% Vs 3.0% in June
--2017 Median Core Infl Fcast Down to 1.5% vs 1.7% June, Unempl 4.3%
--Hurricanes Could Dampen Activity, Boost Infl; Effects Temporary
By Jean Yung
WASHINGTON (MNI) - The Federal Reserve on Wednesday set into motion a
multi-year program to shrink its $4.5 trillion balance sheet and kept short-term
interest rates on hold, as expected. Updated forecasts and the post-meeting
policy statement also left a December rate increase on the table and signaled
confidence about the pace of planned hikes next year.
The Federal Open Market Committee's updated quarterly forecasts call for a
fed funds rate in the 1.25% to 1.50% range by year-end, matching June's forecast
and representing one more rate increase this year. For 2018, the median
policymaker sees the benchmark rate in the 2.00% to 2.25% range, unchanged from
June, though those who had forecasted higher rates in June pared them back as
officials downgraded expected progress on their inflation target.
Importantly, the FOMC's estimate of the longer run fed funds rate fell
two-tenths to 2.8%, indicating officials view the current stance of policy is
actually closer to neutral than policymakers thought in June.
"The Committee expects that economic conditions will evolve in a manner
that will warrant gradual increases in the federal funds rate," the FOMC said in
its policy statement.
Reinvestment of Treasuries and mortgage-backed securities on the Fed's
balance sheet will begin to be phased out in October, the FOMC said. The move
marks the start of a new chapter in the Fed's deployment of unconventional
policies to support the economy after the financial crisis and signals a gradual
pullback of monetary stimulus as rates move further away from zero.
Thus far, markets have shown little concern about the plan officials
describe as passive and predictable. Instead they are more focused on the rate
guidance amid a midyear shortfall in inflation. Wednesday's Summary of Economic
Projections puts markets on notice that rate hikes remain an active part of the
In the so-called dot plot, 11 FOMC members, including nonvoters, expect one
more hike to be appropriate this year, up from eight in June. Fewer members,
just one, viewed it appropriate to increase rates two more times this year. The
rest, four members, called for no more hikes this year, same as the June
The higher dots drifted lower in 2018 as well, but now six instead of five
officials are in the three-hike camp -- assuming 2017 concludes with another
hike. Four committee members are calling for two or fewer hikes and seven want
four or more hikes.
Ahead of the meeting Wednesday, futures markets were pricing in a 56%
chance of a December increase and no more than two rate hikes between now and
the end of 2018, according to CME Group.
In its policy statement, the FOMC again noted the soft inflation data,
reiterating that headline and core inflation had "declined" this year and are
"running below 2 percent."
Officials forecast the core personal consumption expenditures price index,
their preferred measure of inflation, to reach just 1.5% by the end of the year,
down from 1.7% in the June projection. For 2018, core PCE is seen missing the 2%
goal by a hair, ending the year at 1.9% rather than reaching that target as the
FOMC had expected in June.
"Inflation on a 12-month basis is expected to remain somewhat below 2
percent in the near term but to stabilize around the Committees 2 percent
objective over the medium term," it said, repeating language from the July
The Fed also acknowledged the impact of an extraordinarily damaging
hurricane season, stating that "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."
Officials also acknowledged that "higher prices for gasoline and some other
items in the aftermath of the hurricanes will likely boost inflation
Still, the Fed offered an upbeat assessment of current economic conditions,
noting job gains "have remained solid in recent months" while the unemployment
rate "has stayed low." Household spending and business fixed investment are also
They said near-term risks to the outlook appear "roughly balanced." And, as
it has for the past year, the FOMC stated: "the stance of monetary policy
remains accommodative, thereby supporting some further strengthening in labor
market conditions and a return to 2% inflation."
Policymakers' median forecast for unemployment and the GDP growth outlook
moved up slightly compared to the June forecast. GDP growth was upgraded by
two-tenths to 2.4% for the year, then slowing to 2.1% in 2018, 2.0% in 2019 and
to its trend rate of 1.8% in 2020. The median year-end unemployment rate
expected was steady at 4.3% this year but is seen falling to 4.1% in 2018 and
2019, down by 0.1 percentage point. The longer run rate of unemployment remained
The Fed also added a new year to its forecast horizon, projecting the fed
funds rate could rise to 2.9% that year, slightly above the estimate of its
longer run neutral rate.
With the economy evolving broadly as expected and rates heading higher, the
FOMC said it is ready to begin implementing its balance sheet normalization
Building on the details the gradual unwind it first unveiled in June, the
Fed on Wednesday said rollover amounts will be allocated "across the month's
maturity dates in proportion to total maturities of SOMA Treasury holdings on
Up to $6 billion of maturing Treasuries and $4 billion of MBS per month
will not be reinvested, starting on Oct. 31. The combined monthly cap will then
rise by $10 billion at three-month intervals over the next 12 months until it
reaches a ceiling of $50 billion per month. The normalization process will
continue until the Fed is "holding no more securities than necessary to
implement monetary policy efficiently and effectively," the specifics of which
officials have yet to define.
In practice, the New York Fed has projected that actual runoff amounts are
not likely to reach these preset caps in most months as less debt is due than
the cap amount. Ultimately, the bank has said, the balance sheet could shrink to
a level between $2.4 trillion to $3.5 trillion, sometime between 2020 and 2023,
with the portfolio consisting primarily of Treasuries. That is still much
greater than its $900 billion size before the Great Recession.
--MNI Washington Bureau; +1 202-371-2121; email: firstname.lastname@example.org