Monday Memo: Boeing investor day, Fed interest rate decision

Monday Memo: Boeing investor day, Fed interest rate decision”

US equity investors could rotate out of high-yielding sectors and into stocks of banks, which would benefit from the next leg up in interest rates, after the Federal Reserve's policy-setting meeting wraps up on Wednesday. It bought the bonds to try to hold down mortgage and other loan rates and support a fragile economy.

While the Fed's expected announcement of the trimming of its balance sheet has been well telegraphed, investors will look for any Fed reveal on its preference for shorter- or longer-dated bonds when it reinvests a portion of its maturing assets. No one is quite sure how the financial markets will respond over time. General market expectation is that the Bank will cut interest rates by 25 basis points.

Compared to the current $4.5 trillion, where it has stayed since hitting that amount in late 2014, the Fed's portfolio was closer to $900 billion before the 2007-2009 financial crisis. The yield on the 10-year Treasury note fell to 2.24 percent from 2.25 percent late Tuesday. The move will gradually increase long-term borrowing rates.

Even so, because the act of shrinking the balance sheet may be perceived as a tightening of monetary policy, it could encourage officials to go even slower with rate increases next year than the three that they projected in June. Energy stocks also rose as oil prices headed higher. Those selections would afford him an unusual opportunity to impose his personal stamp on the world's most powerful central bank.

The Fed will update its economic forecasts, which are compiled from the projections of its board members and the 12 regional Fed bank presidents. Inflation has stalled, and prices are now rising just 1.4 per cent annually.

Yet experts generally believe that the Fed will stick to its guns, repeating its opinion that low levels of inflation are "transitory". Years of careful planning will keep the process very quiet. More recently, she has wondered whether something more widespread might be keeping inflation low.

The Fed has felt confident to raise rates because it appears to have met one of its key mandates: Maximizing employment. She will certainly be asked.

Then there are geopolitical jitters emanating from North Korea and the recent departure of deputy governor Fischer means the Fed could be in peril of having its "head lopped off" when Janet Yellen's term also comes to an end in January 2018. Trump said last week that he likes and respects Yellen but hasn't made a decision yet about the next Fed chair. But earlier this month, people familiar with Mr. Trump's thinking said he was unlikely to pick Mr. Cohn.

Yellen has politely dodged questions about whether she would stay for a second term, if renominated.

However, they noted that they believe the "risk is that Yellen takes a more dismissive line toward the downside surprises in the inflation data", similar to that given in a by New York Fed president William Dudley.

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