(Excerpt's from AAII’s Charles Rotblut journal Sept. 21 2017 on the results of the September Fed meeting.)
Federal Open Market Committee (FOMC) announced its plan to unwind its balance sheet. Starting next month, the Federal Reserve will stop reinvesting $6 billion of proceeds from maturing Treasury securities and $4 billion proceeds from maturing agency debt and agency mortgage-backed securities. The dollar amounts will be gradually rising each month, subject to adjustments as warranted. By not reinvesting the proceeds of maturing bonds, the central bank is effectively reducing demand for those bonds. The effect of this on the credit market will be the subject of economic studies and textbooks for decades to come. Fed officials are going to have to be sensitive to any ripples in the credit markets and adjust accordingly. To predict how things will turn out is to make a big guess. It’s an uncertainty, but it’s a well-telegraphed uncertainty and so far the bond markets have not shown signs of fear about it.
The FOMC also updated its forecasts for economic growth, keeping the annual long-term projection for GDP expansion at 1.8%. Interest rates were left unchanged and expectations for how rates will be raised next year trended downward.
All of this is occurring as Fed Chair Janet Yellen’s term will expire in February. President Trump will have four Federal Reserve Board vacancies to fill once vice chair Stanley Fischer steps down in October. The sheer number of personnel changes could alter future monetary policy from what it would have been. Yellen’s approach has been dovish. Whether the president’s appointees to the Federal Reserve will be comparatively more hawkish or dovish remains to be seen.
Trump has relied heavily on borrowing. This would suggest a preference to keeping interest rates low. As long as inflation remains at tame levels, the economic data would make it hard to justify a shift to a significantly more hawkish monetary stance.
