"As widely expected, the FOMC announced the start of its balance sheet normalization program," note Rabobank analysts.
Key quotes:
"Starting in October only principal payments that exceed gradually rising caps will be reinvested. The cap will start at $10bn per month and increase in steps of $10bn at 3-month intervals until it reaches $50bn per month. Note that the initial $10bn cap and following $10bn steps are composed of $6bn for US treasuries and $4bn for agency MBS and agency debt. Once the caps reach their respective maximums of $30bn/month for treasuries and $20bn/month for agency debt and MBS – which is 12 months after the start of the normalization program –, they will remain in place until the FOMC judges that the Fed is holding no more securities than necessary to implement monetary policy efficiently and effectively."
"Still aiming for a third hike"
"Also, as widely expected, the FOMC did not change the target range for the federal funds rate, which therefore still stands at 1.00-1.25%. Most of the market’s interest was focused on the dot plot, which showed that the FOMC is still aiming for a third hike before the end of the year, and three more in 2018. The three hikes that were projected for 2019 in the June projections, are now spread across 2019 (the first two) and 2020 (the third). This would bring the fed funds rate slightly higher than the longer run forecast, which was reduced to 2.8% from 3.0%. The FOMC noted that past experience suggests that the storms are unlikely to materially alter the course of the economy over the medium term, and they could boost inflation temporarily because of higher prices of gasoline and some other items. The Fed’s decision and projections were interpreted as hawkish and boosted US treasury yields and the US dollar."
"While the Fed remains on course, we still have our doubts about the third rate hike. Note that the minutes of the previous meeting, in July, revealed a fierce debate about the inflation outlook. At the press conference, Fed Chair Yellen was not able to offer a good explanation for low inflation this year. We expect core inflation to continue to fall short, which should induce the FOMC to delay the next hike to next year. Note that retiring Vice Chairman Fischer – who would be inclined to vote for a hike – will no longer be a voter at the next two meetings. What’s more, the balance sheet normalization that starts in October already implies an automatic pace of monetary tightening that is equivalent to one rate hike of 25 bps per year, according to our calculations."
"Looking further ahead, we would like to note that the projections made by the current FOMC for 2018 and beyond may be less relevant than usual. Vice Chairman Fischer will retire next month, while Chair Yellen’s term ends by the end of January next year. This means that 4 of 7 seats in the Board of Governors – including the two most important members of the FOMC – will be appointed by the Trump administration, which could have an impact on the course that the Fed will take in the coming years."
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended content
Editors’ Picks
EUR/USD trades weak below 1.0800 amid Good Friday lull, ahead of US PCE
EUR/USD remains depressed below 1.0800 after soft French inflation data, amid minimal volatility and thin liquidity on Good Friday. The pair keenly awaits the US PCE inflation data and Fed Chair Powell's speech for fresh hints on next week's price action.
GBP/USD holds steady above 1.2600 as markets stay calm on Good Friday
GBP/USD trades sideways above 1.2600 amid a typical Good Friday trading lull. A broadly firmer US Dollar could keep any upside attempts limited in the pair ahead of the US PCE inflation data and Fed Chair Powell's appearance.
Gold price sits at all-time highs above $2,230, US PCE eyed
Gold price hit all-time highs at $2,236 on Thursday to finish Q1 2024 with a bang. Most major world markets, including the US are closed due to Holy Friday, leaving volatility around Gold price highly subdued. US PCE inflation and Powell are awaited.
Jito price could hit $6 as JTO coils up inside this bullish pattern
Jito (JTO) price has been on an uptrend since forming a local bottom in early January. Since then, JTO has revisited the key swing point formed in early December, suggesting the bulls’ intention to move higher.
Key events in developed markets next week
Next week, the main focus will be inflation and the labour market in the Eurozone. We expect services inflation to be impacted by the easter effect, while the unemployment rate to be unchanged.