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US Fed expected to leave rates unchanged; balance sheet in focus

LiveMint logoLiveMint 26-07-2017 Jason Lange

Washington: The Federal Reserve is expected to hold interest rates unchanged on Wednesday and possibly hint that it will start winding down its massive holdings of bonds as soon as September in what would be a vote of confidence in the US economy.

The US central bank will issue its latest rates decision following the end of a two-day policy meeting at 2 pm EDT (1130 IST). Economists expect the Fed’s benchmark lending rate to remain in a target range of 1% to 1.25%.

That would mark another pause in the monetary tightening campaign that the Fed began in December 2015. The central bank has raised rates twice this year, including at its last policy meeting in June.

Wall Street analysts see little chance the Fed will announce the start of the wind down of its $4.5 trillion balance sheet. However, the Fed’s policy statement may provide more visibility on when that might occur.

Citibank economists said in a note to clients that the Fed’s rate-setting committee was more likely to say that the trimming would start soon. “(That would) signal that the committee plans to announce balance sheet reduction in September,” they said in the note.

Reducing the balance sheet will unwind one of the Fed’s most controversial tools used to fight the 2007-2009 financial crisis and its aftermath.

After pushing rates nearly to zero in a bid to boost investment and hiring, the Fed pumped over $3 trillion into the economy through purchases of US Treasury securities and government-backed mortgage debt to further reduce rates. That programme drew criticism from Republican lawmakers in Congress.

The subsequent economic recovery, marked by strong and steady job gains, has pushed the US unemployment rate to 4.3%, near a 16-year low. Fed policymakers have said labour market strength could eventually push inflation too high.

The Fed recently signalled it would begin to trim its balance sheet this year. Yellen said earlier this month that process could begin relatively soon and economists polled by Reuters expect the announcement will come in September.

But a slowdown in inflation this year has caused jitters among some Fed officials who are already concerned that inflation has been below the central bank’s 2% target for five years.

The Fed’s preferred measure of underlying inflation dropped to 1.4% in May. It was 1.8% in February. Reuters

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