Economy

Right side of balance sheet

Right side of balance sheet”

The weakness among treasuries came after the Fed left interest rates unchanged as widely expected but signaled another rate hike is likely this year.

Reducing the size of the Fed's balance sheet will mean reducing the quantity of reserves in the financial system.

The reductions will begin in October with a target of $10 billion a month - comprised of about $6 billion in Treasury bonds and $4 billion in mortgage bonds - and that will increase to $50 billion a month in 2018. This approach suggests that tapering will occur at a glacial pace. Hopefully, the Fed won't do anything drastic that could spook the bond market. U.S. Fed chair Janet Yellen aims to avoid a similar financial outpouring. A new board composition could accelerate changes in policy and have unintended effects on markets.

China's markets were already closed by the time it came but it kept the pressure on metals and emerging markets stocks which were already down after the Fed meeting and as Russian Federation was forced to bail out one of its large banks.

While this is welcome added clarity on the Fed's intentions, they have once again missed an opportunity to offer a comprehensive strategy for conducting monetary policy.

In summary, despite the visible current hawkish position of the Fed, which helped Dollars yesterday, and may continue to do so in the near future, the long-term outlook for the US currency for the next 3-6 years is clearly worse than that of its competitors due to the understanding that the Central Bank is unlikely to raise interest rates as much as in previous cycles of monetary tightening.

The Fed will hike as gross domestic product (GDP) growth and inflation allow in order to create a cushion in the event the economy rolls over. The big question that forex market participants will be waiting to be answered is with respect to the Fed board's forecasts for future rate increases (the "dot plot") and the assessment of economic conditions - together with fresh forecasts about growth, inflation and unemployment.

August's year-on-year inflation increase of 1.9% is progressing toward the Fed's goal of 2%. There was a chance that the Fed would appear more dovish with respect to the prospects for tightening in 2018 and 2019 but would likely stay the course for a December hike. Gold prices fell as the USA dollar rose after the FOMC meeting. Some economists worry such a vast lake of bonds is distorting the market and is in danger of distorting it more if it gets out suddenly. For each rate hike since the crisis, the Fed has needed to raise the IOER rate as well in order to have a commensurate rise in the policy rate. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, is down by almost a basis point at 2.234%. No forecasts can be guaranteed. There is no guarantee that the information supplied is accurate, complete, or timely, nor are there any warranties with regards to the results obtained from its use.



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