December 16 2017

Monday Memo: Boeing investor day, Fed interest rate decision

December 16 2017, 03:06 | Clarence Walton

The Fed's Long March to Normal

Federal Reserve Board Chairwoman Janet Yellen speak during a news conference after the Fed releases its monetary policy decisions in Washington U.S

Fed policymakers chose to leave the central bank's short-term benchmark interest rate between 1 percent and 1.25 percent, but also said they still expect to increase the rate one more time this year and three times in 2018, if persistently low inflation rebounds.

Stocks turned lower after the announcement.

Therefore, the Fed can feel confident that its own measures should not send yields flaring up in a disrupting way for bond markets.

But these rather dramatic moves in bond prices are not harbingers of a more rapid sell-off as the Fed unwinds its bloated balance sheet. The Fed wrapped up a two-day meeting of top US economic policymakers on Wednesday, Sept. 20, 2017.

The prospect of another Fed rate hike this year at a time when the US economy is growing modestly and may slow somewhat from the impact of hurricanes Harvey and Irma, could be bad news for stocks the next few weeks, Chalupnik said. In sum, that means the Fed now believes it won't reach its 2 percent target until 2019. The Nikkei jumped 2% to end at 20,299.38, the highest closing level since August 2015.

Several Fed governors have expressed concerns about the relatively low inflation. Hurricanes Harvey, Irma, and Maria have devastated many communities, inflicting severe hardship. Next month, the bank will begin selling $6 billion per month of Treasury bonds it holds and $4 billion per month in agency debt and mortgage-backed securities.

But this week, Murata said, the main factor for the yen is Japanese Prime Minister Shinzo Abe, who is considering calling an election for as early as next month. The risk exists that investors could become spooked by the rising number of bonds being transferred back into private hands. However, the important bit will be whether they maintain their commitment to more gradual rate rises.

Anticipation of this week's monetary policy meeting also saw United States bond yields rise in recent days, with investors expecting the Fed will start gradually tightening the money supply.

The Fed holds $2.4 trillion of Treasuries that it lends out through its reverse repurchase agreement, or repo, facility in exchange for overnight loans.

"We see the odds of a summer Fed rate increase rising if USA data this week show solid job gains, rising wages and an inflation pick-up", wrote Richard Turnill, BlackRock's global strategist.

"Despite the 1 percent total increase in the Fed funds over the last 19 months, money market and short-term CD rates barely budged", Pan writes. But economic growth and low unemployment suggest they should act.

The Fed's wind-down could also create an uptick in the number of loans that are not settled on time, a problem that has anxious regulators including the New York Fed in the past.

Of course, raising rates is also part of policy normalisation. Kraft Heinz fell 1.2 percent. It has raised them four times since the end of 2016. However, the forecasts for subsequent years were less aggressive. "This could come in multiple forms such as the Fed's economic projections, statement and also Fed chair Yellen's testimony". But Cohn appears to have fallen out of favor after he was critical of the president's response to the violence in Charlottesville, Virginia.

At her news conference, Yellen declined to say whether she would like to serve a second term. She has kept unwavering faith in the Philips curve and therefore reasonably expect inflation to strengthen in the near term.

While the Fed mulls its next move the pound continues to shine against the dollar after the Bank of England last week indicated it would likely tighten monetary policy itself very soon.

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