Yellen could tee up a stealth rate hike for later this year..but did it today
As the market expects the Federal Reserve to increase rates three times this year, the central bank could put a fourth on the books in a way that’s not so obvious.
An additional increase — call it a stealth hike — would involve a concerted reduction in the Fed’s balance sheet. The balance sheet holds the various bonds and other financial instruments the Fed has purchased over the years, and it has ballooned to $4.5 trillion.
Under current policy, whenever a bond held by the Fed matures, it reinvests the proceeds it receives and rolls over the debt. By doing that, it keeps the central bank as a player in the bond market, which in turn creates demand and stifles supply to keep interest rates low.
Reversing the reinvestment policy, then, would have the opposite effect. Officials have begun some discussion in recent months about balance sheet policy but have not offered details or a timetable.
Some market participants think that could change Wednesday — if not from the post-meeting statement from the Federal Open Market Committee, then from Chair Janet Yellen at her news conference afterward.
“Chair Yellen has previously indicated that balance sheet reduction will occur once the FOMC has ‘confidence the economy is on a solid course,'” Citigroup strategists Andrew Hollenhorst and Ebrahim Rahbari said in a note. “Any calendar or policy rate threshold guidance relative to market expectations of Q1 2018 would provoke a market reaction.”
There aren’t that many ways the Fed can surprise investors at this week’s meeting. Traders assign a 93 percent chance that the FOMC will hike its benchmark borrowing rate a quarter point, and are now on board with officials’ projections that two more moves are in the cards this year.
But substantial clues about the direction of the balance sheet would be one way to move markets, particularly if Yellen gets aggressive. The chair in the past has said a roll-off in the balance sheet would be worth two quarter-point hikes.
However, she’s been cautious about pushing the case.
The US Federal Reserve has sought to head off rising inflation with a third interest rate rise since the 2008 financial crash and the second in three months, taking the base rate from 0.75% to 1%.
The central bank set aside concerns about the impact of higher interest rates on consumer spending to confirm analyst projections that it is prepared to increase rates several times this year to keep a lid on inflation as it rises above its 2% target level.
The Fed’s chair, Janet Yellen, said a wide range of indicators showed the US economy was in rude health, allowing its interest rate setting committee to push rates back towards historically normal levels. Policymakers voted nine to one to raise rates.
Speaking after the decision, Yellen said she had met Donald Trump’s treasury secretary, Steven Mnuchin, “a couple of times” but had only been “introduced” to the president himself.
“I fully expect to have a strong relationship with secretary Mnuchin,” she said. “We had good discussions about the economy, about regulatory objectives, the work of the FSOC [Financial Stability Oversight Council] global economic developments, and I look forward to continuing to work with him.” She said she had had a very brief meeting with Trump “and appreciated that as well”
follow the trend till the bend..
“The central bank set aside concerns about the impact of higher interest rates on consumer spending to confirm analyst projections that it is prepared to increase rates several times this year to keep a lid on inflation as it rises above its 2% target level.”
inflation or deflation stopper?