Thursday, 18 October, 2018

Fed to start reducing $4.5 trillion balance sheet

US Fed announces plan of $4.5 trillion balance sheet reduction US President Donald Trump speaks in a meet outside White House
Laurie Berry | 22 September, 2017, 09:04

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

The more immediate and headline-grabbing news out of Wednesday's rate announcement, of course, was the Fed's key rate itself: The Fed held its target for the federal funds rate at 1 per cent to 1.25 per cent, where it has sat since June, following three quarter-percentage-point rate hikes in the prior six months.

Yellen said in June that the plan would lead to "a gradual and largely predictable decline" in the assets.

Yellen can expect to be asked, again, about whether she's discussed her future with President Donald Trump, after it emerged that she had breakfast with his daughter Ivanka in July.

"It might be a heavy lift to raise rates three times at the same time they are shrinking the balance sheet", said Scott Anderson, chief economist at Bank of the West in San Francisco, who sees the median FOMC forecast slipping to two quarter-point increases in 2018.

Given the Fed's statement at its June 2017 policy meeting, the balance sheet reduction should begin gradually at USD 10 billion per month, i.e.by no longer reinvesting each month a volume of USD 6 billion of maturing Treasuries and USD 4 billion of maturing agency bonds, such as mortgage-backed securities. The jobless rate is just 4.4 percent, near a 16-year low. Investors typically sell shares of utilities when interest rates rise, partly because they lose their appeal as bond proxies since investors can expect similar returns investing in bonds.

The Fed expanded its balance sheet to unheard-of levels during the 2008-2009 financial crisis and its lingering economic aftermath, first to stave off financial and economic collapse, and then to keep the USA economy on what was effectively a monetary respirator until it could return to normal strength. Presidential economic adviser Gary Cohn, a prior favorite for Fed chair, appears to be on the outs with the president after criticizing the administration's response to violence from white supremacists in August in Charlottesville, Virginia.

The Fed will scale back its holdings by $10 billion in October and raise that amount gradually in the months to come.

Klopp defends 'unlucky' Liverpool star after Foxes display
The England global was heavily criticised for a poor display on his full debut at Leicester but Klopp is not concerned. But we know how they play usually. "Next week, we are going to play like that".

On the other hand, the Fed remained unshaken in its confidence that the economy's underlying strong trend remains intact, and that the sluggish inflation is temporary.

Federal Reserve Chair Janet Yellen says the "severe disruptions" from Hurricanes Harvey, Irma and Maria will briefly hold down economic growth.

South African bonds were marginally weaker at midday on Tuesday as the market remained focused on the Reserve Bank's interest rate decision on Thursday, and the release of consumer inflation data on Wednesday.

One of the more notable takeaways for me was in Yellen's press conference where she admitted she hadn't met with Trump and used the phrase "future policymakers" in answering a question. The balance-sheet expansion was result of the Fed's so-called quantitative-easing programs - buying up financial assets to keep money flowing through the economy.

To cut the long story short, the Fed just wants to undo everything that has not worked: unconventional policies. The Fed, though, has yet to achieve its other objective of stabilizing prices at a 2 percent annual rate.

That prompted a sector rotation out of stocks like utilities - with the S&P utilities index down 0.8 percent - and into banks.

The seven-member Fed board will soon have four openings, after the announcement this month by Stanley Fischer that he is stepping down as vice chairman.

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