The Federal Open Market Committee wrapped up its sixth meeting of 2017 today, followed by a press conference with Federal Reserve Chair Janet Yellen. Investors kept a close eye on Yellen’s announcements to learn what the committee decided about the federal funds rate, the Fed’s balance sheet and what directions they may take in the future.
Here’s what came of the September FOMC meeting:
Federal funds rate stays the same
As expected, the FOMC decided to keep interests rates unchanged at a range of 1 percent to 1.25 percent, according to the statement the Fed issued after the two-day meeting concluded. To give people an idea of what’s to come, the FOMC releases the Summary of Economic Projections, which includes a “dot plot” that depicts where each member believes the interest rate should be in the near- and long-term.
The dot plot showed that the median member believes there will be another rate hike by the end of the year; most of the members’ dots were placed in the 1.25-1.5 percent range, one notch up from where they are now, Business Insider reported.
Some experts wondered whether the recent damage incurred by Hurricanes Harvey, Irma and Maria would affect the Fed’s decisions. The statement released answered these questions clearly: The Fed believes that, while the cost of gas and other supplies may increase in the short-term, the storms shouldn’t impact the economy much in the medium-term. As such, the Fed likely won’t make any policy changes based on these events.
Balance sheet normalization to begin next month
The next order of business was the Fed’s balance sheet, which today stands at $4.5 trillion. The balance grew so high out of an economic stimulus plan following the Great Recession, which consisted of buying large amounts of bonds and Treasuries. Now that the economy seems to be doing much better, the Fed has started to think about dialing back the program.
First announced earlier this year, investors have been champing at the bit to get more information. The choices the Fed makes on how to reduce its debts can have an impact on markets, Business Insider explained. As such, it’s important to investors that they know what will happen, when. As of the July Fed meeting, details remained sparse.
“If they begin to let the balance sheet roll off in an aggressive way, that’s taking money out of the system, and that would be negative for equities,” Byron Wien, the vice chairman of Blackstone’s private wealth solutions group, told Business Insider.
The Fed announced it would begin the normalization process in October. It will take a slow approach, choosing to not reinvest bonds as they mature rather than following the protocol that has been in place for years, which says that all bonds will automatically be reinvested upon maturation. By doing this, the bonds will no longer be on their balance sheet, which will slowly decrease.
To start, the Fed expects to shed $4 billion per month in mortgage securities and $6 billion per month in Treasuries. Each quarter this number will grow until it eventually reaches $20 billion per month in mortgage securities and $30 billion per month in Treasuries.