Federal Reserve Holds Steady on Interest Rates

Federal Reserve holds steady on interest rates, announces plans for balance sheet drawdown


The U.S. Federal Reserve (Fed) announced that it will begin to unwind its balance sheet beginning in October.

The drawdown will initially be capped at $10 billion monthly and will increase by $10 billion quarterly until it reaches $50 billion per month.

As this has been discussed for several months already by Fed Chair Janet Yellen, most financial markets have already begun to price the drawdown into their projections. We do not expect to see major volatility in the markets as a result of this announcement.

Although the Fed left interest rates unchanged, it did signal the potential for one more rate increase by the end of the year. The Fed also anticipates three increases in 2018. These are contingent, however, on whether inflation rates continue to stay lower than expected.

In describing the reasoning behind the Fed’s decisions, Yellen stated, “What we need to figure out is whether the factors that have lowered inflation are likely to prove persistent.” Continued low rates “would require an alteration of monetary policy,” she said.

“The announcement today is in line with what we expected to hear,” said Mark Beischel, Ivy’s Global Director of Fixed Income. “The market’s short-term reaction has been an increase in bond yields and strengthening of the dollar, which leads us to believe the market is looking at this action as being a little more ’hawkish’ than anticipated.”

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