Published: Wed, September 20, 2017
Business | By Max Garcia

Markets subdued ahead of Fed policy decision

Markets subdued ahead of Fed policy decision

Federal Reserve's policy meeting. Economists believe it will take several years before the Fed can reduce its balance sheet down to $3 trillion.

The European Central Bank, for its part, undertook two rate hikes in 2011 that it subsequently reversed, then in 2015 started its own purchases.

The Fed expanded its bond holdings - the major assets on its balance sheet - in the years after the financial crisis erupted in 2008. And now it's time for the Fed to begin selling that debt. "The Fed has laid out a roadmap, and there is really a sense of relief to finally get it started". The Fed has given investors months to digest its forthcoming move and has stressed that the paring of its balance sheet will proceed extremely gradually.

"There's no reason not to start normalizing policy".

Joshua Mahony, a market analyst at online trading house IG (Frankfurt: A0EARV - news) said that there was little in the speech to make markets believe a military escalation is near. The Fed has already clearly laid out how it plans to shrink its huge $4.5 trillion balance sheet and no surprises are expected. Wages and salaries for American workers still aren't rising very rapidly despite the lowest unemployment rate in 16 years.

In other words, inflation is signaling that the Fed should not increase rates.

The "neutral" rate is the appropriate rate for the level of inflation, which has moved structurally lower over time. "They might have to scale back on how aggressively they raise rates over the next couple of years".

"I suspect they are not going to raise rates quite yet; I suspect they will guide towards December", said David Hussey, head of global core equities at Manulife Asset Management.

The U.S. central bank's description of inflation in its policy statement as well as fresh economic forecasts from individual policymakers will be the main focus for financial markets amid a recent spate of lukewarm domestic data.

"Fed will likely be a non-event, but if they are slightly more dovish in their language, I think you could see a reversal in the banks, but I don't see a lot of activity", said Aaron Clark, portfolio manager at GW&K Investment Management.

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.

"One of the pre-conditions Chair Yellen had stipulated back in March was the need for solid underlying momentum in the U.S. economy, and recent weather-related disruptions may give officials a reason to hold fire", he said.

Many Fed watchers have expressed their belief that Yellen has performed well and deserves a second term as chair. But Cohn appears to have fallen out of favor after he was critical of the president's response to the violence in Charlottesville, Virginia.

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.

But it remains to be seen whether central bankers are more concerned about the temporary slowdown, or will brush it off.

But with financial conditions supportive, the Fed's runoff will remain on "autopilot" unless there are "large adverse developments" that force adjustments, Fed Governor Lael Brainard said this month. That's a lot of turnover and uncertainty.

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