FOMC hints at balance sheet reduction from September - ANZ

Analysts at ANZ note that the US Federal Reserve left interest rates unchanged as expected, but it softened its language on inflation and hinted that it would begin balance sheet reduction in September (changing the wording around timing from “this year” to “relatively soon”).

Key Quotes

“The former is a dovish development, but the latter is less clear cut. On the one hand, balance sheet reduction will tighten US financial conditions, but to the extent that balance sheet reduction and low inflation delay rate hikes, it does mean that policy rates in the US will be low for longer.”

“Against a backdrop of softening inflation, the market also appears to be reading it as a bit aggressive (ie. will be a drag on US growth), with the USD sold and bonds rallying on the news. It certainly seems that the Fed is keen to press on and unwind QE regardless. If it does, that will have consequences for risky assets, including the NZD. However, things are not exactly rosy in the US right now; some patience may be required.”