Fed to commence balance sheet normalization relatively soon

The Federal Reserve issued its Federal Open Market Committee (FOMC) statement today. Information received since the Board of Governors of the Federal Reserve System last met in June points to further strengthen in the labor market while economic activity has moderately increased since the start of the year. According to the statement, “Job gains have been solid, on average, since the beginning of the year, and the unemployment rate has declined. Household spending and business fixed investment have continued to expand. On a 12-month basis, overall inflation and the measure excluding food and energy prices have declined and are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.”

The Committee is pursuing maximum employment which is in line with its statutory mandate. The Committee expects that, “gradual adjustment in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term.” The Fed views the near-term risks to the economic outlook as roughly balanced and is monitoring inflation developments closely. Normalization of the Fed’s balance sheet is expected to begin “relatively soon” provided that the economy evolves broadly as anticipated and has left their benchmark policy rate unchanged at 1% – 1.25% as they assess progress toward their inflation goal and further strengthen of the labour market.

Further adjustments to the target range for the federal funds rate hangs on the assessment of realized and expected economic conditions relative to its objectives of maximum employment and 2% inflation. According to the Fed, the assessment, “will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.”

Balance sheet normalization according to the statement is expected to commence “relatively soon” provided that the economy evolves broadly as anticipated.

The Committee through this process, intends to gradually reduce the Federal Reserve’s securities holdings by decreasing its reinvestment of the principal payments it receives from securities held in the System Open Market Account.



Company Disclosure -The information contained herein has been obtained from sources believed to be reliable, however its accuracy and completeness cannot be guaranteed. You are hereby notified that any disclosure, copying, distribution or taking any action in reliance on the contents of this information is strictly prohibited and may be unlawful. Mayberry may effect transactions or have positions in securities mentioned herein. In addition, employees of Mayberry may have positions and effect transactions in the securities mentioned herein.