FOMC Schedules Asset “Normalization” as Expected
Federal Reserve officials set an October start for shrinking their $4.5-T of assets, moving to unwind a pillar of their crisis-era support for the economy.
FOMC forecasts 1 more interest-rate hike later this year, saying storm damage will have a temporary impact on the economy.
“Hurricanes Harvey, Irma and Maria have devastated many communities, inflicting severe hardship,” the Federal Open Market Committee said in its statement on Wednesday following a 2-day meeting in Washington. “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.”
FOMC left the benchmark interest rate unchanged in a range of 1 to 1.25% as expected.
The US economy expanded at a 2.1% annual rate in 1-H of Y 2017, and US government 10-year notes yield about 2.24%, down from 2.45% at the start of the year. The Fed’s preferred price gauge rose 1.4% in July from a year earlier.
The decision to leave the target range for the federal funds rate unchanged and begin the balance-sheet runoff in October was unanimous.
The FOMC reiterated that interest rates are likely to rise at a “gradual” pace, though updated forecasts indicated that officials see the path as less steep than before.
In their new set of projections, Fed officials estimated 3 1 Quarter-point rate hikes would be appropriate in Y 2018, the same number they saw in June, that based on the median in the dot plot of interest-rate forecasts.
The Fed’s decision to exit from balance-sheet policies comes a decade after the global financial crisis began to tip the economy into a recession at the end of Y 2007. The reduction in assets will be slow — just $10-B a month to start.
The Fed said the balance-sheet runoff would follow the framework released in June, and it anticipates ending the runoff at some point, though it does not have a specific date.
Minutes from the July meeting showed deepening worries about a prolonged period of low inflation.
FOMC participants forecast that inflation will reach their 2% target in Y 2019, compared with an expectation of Y 2018 in June, based on median estimates.
They have missed the target for the past 5 years.
The decision to set the 1st balance sheet roll-offs for October was in line with the expectations of a majority of analysts surveyed ahead of the meeting.
Economists had also forecast that Fed policy makers would maintain their projection for 1 more rate increase this year, and take that action in December.
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