Interest Rates and The Federal Reserve’s Reversal of The Stimulus Program

Federal Reserve chairwoman Janet Yellen stated Wednesday that rates are being held, but hinted of a possibility that a rate-hike is under consideration. Additionally, Yellen confirmed that through unanimous decision the Fed will reduce its balance sheet starting in October this year. The statement shows confidence that recent stagnant inflation measures are temporary. The dollar bounced back from losses earlier in the day as announcements were being made.

The balance sheet, which roughly quintupled in size to $4.5 trillion since before the financial crisis, is supposed to be reduced in October by $10 billion and $10 billion for every month after. One year later, on October 2018, the Fed is planning on approaching normalization at a rate of $50 billion per month.

Some investors are worried about the lack of precedent in reducing the balance sheet to this size. Keith Knutsson of Integrale Advisors argued, “the Fed has undoubtedly been playing an increasing role in recent years in the US economy… but it is to be noted that a misstep with its current size could send US markets in a frenzy. “

The meeting did acknowledge recent damage attributable to natural disasters, but policymakers remain confident that long-term economic growth is not harmed by these events. The damage inflicted by recent hurricanes is solely affecting things “near-term”, with the New York Fed President even suggesting that rebuilding efforts could give a boost to the economy.

Despite already positive-looking economic developments, the Fed commented that consumers are continuing to spend, and business investments are “picking up”. New GDP data has been adjusted and now projects a faster growth this year of 2.4 percent, an increase from the 2.1 percent previously forecasted. Unemployment projections have meanwhile been lowered to 4.1 percent, .1 percent lower than before.

This article first appeared on my blog here.

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