by Scott Krisiloff, CIO, Avondale Asset Management
The Fed started a new chapter of its own and so I didnât want to miss chronicling what is probably the biggest economic event of the year.
The Macro Outlook:
The Fed will wind down its balance sheet
âin October we will begin the balance sheet normalization program that we outlined in June. This program will reduce our securities holdings in a gradual and predictable manner.â âFed Chair Janet Yellen (Central Bank)
The pace will gradually accelerate throughout 2018
âFor October through December, the decline in our securities holdings will be capped at $6 billion per month for Treasuries and $4 billion per month for agencies. These caps will gradually rise over the course of the following year to maximums of $30 billion per month for Treasuries and $20 billion per month for agency securities and will remain in place through the process of normalizing the size of our balance sheet.â âFed Chair Janet Yellen (Central Bank)
There is a high bar to resuming reinvestment
âyou asked me what would it take for us to resume reinvestmentâŠif there is a material deterioration in the economic outlook, and we thought we might be faced with the situation where we would need to substantially cut the federal Funds Rate, and could be limited by the so-called zero lower bound, it, it is that type of determination that our committee is saying would, might lead us to read, to resume reinvestmentâŠso, that is a somewhat high bar to resume reinvestmentsâŠto some small negative shock, our first tool, our most important and reliable tool will be the federal funds rate, but if there is a significant shock that some material deterioration to the outlook, we would consider resuming reinvestment.â âFed Chair Janet Yellen (Central Bank)
The fed wants to focus on the fed funds rate
âas weâve noted previously, changing the target range for the federal funds rate is our primary means of adjusting the stance of monetary policy. Our balance sheet is not intended to be an active tool for monetary policy in normal times. We therefore do not plan on making adjustments to our balance sheet normalization program.â âFed Chair Janet Yellen (Central Bank)
The fed funds rate is still accomodative
âmy colleagues and I on the Federal Open Market Committee decided to maintain the target range for the federal funds rate at 1 to 1-1/4 percent. This accommodative policy should support some further strengthening in the job market.â âFed Chair Janet Yellen (Central Bank)
Further increases are warranted
âwe continue to expect that the ongoing strength of the economy will warrant gradual increases in that rate to sustain a healthy labor market and stabilize inflation around our 2 percent longer-run objective.â âFed Chair Janet Yellen (Central Bank)
Low inflation is likely due to transitory causes
âwe believe this yearâs shortfall in inflation primarily reflects developments that are largely unrelated to broader economic conditions. For example, one-off reductions earlier this year in certain categories of prices, such as wireless telephone services, are currently holding down inflation, but these effects should be transitory.â âFed Chair Janet Yellen (Central Bank)
Inflation has been low but that doesnât mean itâs going to continue
âIâve mentioned a few idiosyncratic things, but frankly, the low inflation is more broad-based than just idiosyncratic things. The fact that inflation is unusually low this year does not mean that thatâs going to continueâ âFed Chair Janet Yellen (Central Bank)
Inflation expectations have come down for all of us
âI think all of us, both market and FOMC participantâs path, paths have come down, not in the last couple quarters, but over the last several years. Thereâs been a growing recognition that the so-called neutral interest rateâŠseems to have come downâ âFed Chair Janet Yellen (Central Bank)
Managing this will likely be up to future policymakersâŠ
âIt will be up to future policymakers to decide, in the event of a severe downturn, whether they think itâs appropriate to again resort to balance sheet, to adding, adding assets to a balance sheetâ âFed Chair Janet Yellen (Central Bank)
Yellen has only met with Trump once
âI have said that I intend to serve out my term as chair, and that Iâm really not going to comment on my intentions beyond that. I will say that I have not had a further meeting with President Trump. I met with him early in my term, and Iâve not had a further meeting with him.â âFed Chair Janet Yellen (Central Bank)
Full transcripts can be found at www.seekingalpha.com
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