Most noteworthy in the statement was a new discussion on the desire to implement QT this year. In the FOMC statement they said they expect “to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated.” Data dependent, right? There was an addendum note on how they will conduct this. The monthly cap on maturing debt that will not be reinvested will total $6b for Treasuries and $4b for MBS. When they tapered in 2014, they did also by $10b per month. But, this “will increase in steps of $6b at 3 month intervals over 12 months until it reaches $30b per month.” A similar pattern will be conducted with MBS.
Neel Kashkari again dissented on the rate hike for a 2nd time and thus believes that .625% is the proper rate in the 9th year of an expansion. The dots still point to one more hike this year.
On the economy, the Fed basically held to its optimistic view on the labor market but softened it a touch by acknowledging that “job gains have moderated” although they still “have been solid, on average, since the beginning of the year.” They actually guided up a touch their comment on household spending and said “business fixed investment has continued to expand.” Barely I say. They did mention the recent softening in the inflation data but still believes it will head to around 2%.
Also to this, a change in paragraph two was that they said “the Committee is monitoring inflation developments closely” which is not different than the last statement but they said it in isolation by taking out “and global economic and financial developments.” Thus, maybe they are less worried about the latter and more so about the former.
As the fed funds rate is still only at 1.125% and the balance sheet remains full, they again acknowledged that “the stance of monetary policy remains accommodative…”
With their forecasts, they raised their 2017 GDP forecast by one tenth to 2.2%, trimmed their unemployment rate by two tenths to 4.3% and cut their PCE core forecast by two tenths to 1.7% BUT held their 2% forecast for the following two years.
Bottom line, while many market people are obsessing about today’s inflation data and what that means for Fed policy, the Fed doesn’t have to decide on what to do next for another 3 months. But, they still seem to want to find every reason to hike one more time and it is why the 2 yr note yield went from 1.29% to 1.33% right after the statement hit the tape. The 10 yr yield at 2.12-.13% was 2.11-.12% just prior. On when QT might begin, Janet hopefully will give some color in the press conference.
Lastly, we are witnessing the problem of the Fed waiting so long to hike rates and shrink their balance sheet as they are now in the unfortunate position of having to wobble after getting the fed funds rate to ONLY 1.125% while keeping a full size balance sheet at the same time economic growth is clearly mediocre with signs growing of further moderation. See again the US Citi Surprise index for evidence:
Peter is the Chief Market Analyst with The Lindsey Group. He is Co-CIO at Bookmark Advisors, a member of the Advisory Services Network and a regular CNBC Contributor.