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Fed Stands Pat On Rates, Will Reduce Balance Sheet In October

20 September 2017

Inflation has stalled, and prices are now rising just 1.4 per cent annually. Yes, cheering for higher prices appears inconsistent with economic prosperity. This demand propels the economy forward.

A third successive record on Wall Street, fanned by speculation about Trump's economic agenda, was not enough to entice buying in the region as equity dealers cash in recent gains.

THURSDAY: The Federal Reserve releases data on US households' net worth for the second quarter.

Still, some Trump aides want a different leader at the Fed, one whose policy isn't quite as expansive as under Yellen and her predecessor, Ben Bernanke.

The Fed has always held a portfolio of financial assets, mostly USA treasuries, to help it manage short-term interest rates.

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The next scheduled meeting for the Fed is September 19-20.

"In 2018, we see three rate increases -the first coming in June- in line with the Fed and well above the market", they concluded. And low inflation can hurt the economy: Businesses get queasy about investing in people and equipment. The Fed, though, has yet to achieve its other objective of stabilizing prices at a 2 percent annual rate. The Fed's preferred measure of inflation has touched the 2 percent target once or twice since the 2008 collapse, but that's it.

Still, Goldman predicts that will still rise by about 20 basis points in the year following the beginning of the program with a further gradual increase as the tapering continues. The long-run outlook for GDP remained at 1.8 percent.

In its forecast, though, the Fed stuck to its view that unemployment is likely to remain at 4.3% in 2017, and then fall slightly to as low as 4.1% two years from now. But they also have something much more unusual to do deal with.

It's a chart that lays out where each Fed voting official thinks interest rates should go this year, next year, two years from now, and in the long run. And therein lies the puzzle that vexes the Fed; trying to explain away a lack of inflation with so many tailwinds at the economy's back. The caution in raising rates comes as inflation has consistently stayed below the Fed target of 2 percent.

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"Though one member noted that easier financial conditions might warrant tighter monetary policy (the conventional wisdom), another floated the more avant-garde view that elevated risky asset prices were a response to markets adjusting to structurally lower neutral interest rates - a factor which the Fed can not control", said Patel.

Still, some economists say they worry that while the Fed's early reductions to its portfolio might not cause a stir, the cumulative sales could eventually unsettle markets.

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. This will tell us how confident the Fed is with their economic projections and give an idea of future hikes. In reality, their internal discussions are a matter of when, not if, the next hike will be.

Markets will move on speculation for the next rate hike.

In June the Fed announced it was considering reducing the number of assets - amounting to circa 3.7 trillion - that it owns on its balance sheet. The impact should be gradually absorbed. John Taylor, a Stanford professor, is best known for inventing a monetary policy formula-the Taylor Rule-that takes discretion out of setting interest rates. Forecasters expect the Fed to leave rates unchanged and stick to plans to raise rates in December. Surveys of economists show they do not expect the Fed to raise interest rates at this time. In fact, the current implied probability of a December rate hike is only 41 percent.

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Fed Stands Pat On Rates, Will Reduce Balance Sheet In October