Fed Poised to Set Portfolio Reduction Plan in Motion
September 19 2017 - 1:29PM
Dow Jones News
By David Harrison
The Federal Reserve on Wednesday likely will announce the
beginning of a yearslong program to shrink its bond portfolio and
could offer clues about the prospects for another rate increase
this year. Officials will release a statement and their updated
quarterly economic projections at 2 p.m. EDT, after the conclusion
of their two-day policy meeting. Chairwoman Janet Yellen holds a
press conference at 2:30 p.m. Here's what to watch.
Watch the Dots
The big question for many central bank observers isn't what's
going to happen at this meeting but rather what the Fed will signal
about the likely path of interest rates this year and beyond. In
June, officials penciled in one more interest rate increase in
2017. But a series of weak inflation reports gave several of them
second thoughts about the tentative plan. Did those doubts
dissipate following Thursday's relatively strong inflation report?
Are we back on track for a December move? Officials' latest
economic projections -- particularly their so-called dot plot that
reveals where they expect interest rates to go -- could give a
hint. Also important will be whether officials lower the number of
rate increases they envision in coming years, and how high they
expect borrowing costs to go before they stop.
Figuring Out Inflation
Inflation has stopped behaving the way policy makers expect it
to. The growing economy and strong labor market should be pushing
it up. Instead, it has been sluggish for most of the year, although
it showed signs of picking up recently. The models that Fed
officials rely on anticipate inflation will rise toward their 2%
target over the next couple of years. Watch their new economic
projections for signs of whether officials have changed their views
on when they expect to reach their goal.
The Incredibly Expanding Labor Market
The labor market continues to improve. Employers keep adding
jobs, pushing down the unemployment rate and drawing more workers
off the sidelines. Right now, the unemployment rate is lower than
the point the Fed considers full employment, which means the
economy could start overheating, causing inflation to rise too
much. But since there are few signs of that happening, officials
could lower their estimate of the jobless rate that indicates full
employment. That would reflect another way that central bankers are
questioning their understanding of how the economy works.
Balance Sheet Questions
The Fed has already provided details of how it plans to reduce
its hoard of Treasurys and mortgage-backed securities. And it
appears poised to announce Wednesday it will start the process in
October.
But we still don't know how big the central bank's balance sheet
will be at the end, a matter that could have implications for the
bond market. Ms. Yellen at her press conference could provide a
sense of her thinking on the topic and the factors that will go
into the decision.
What Comes Next?
Hanging over Ms. Yellen's press conference is the question of
who will run the Fed once her term as chairwoman expires early next
year. In late July, President Donald Trump told The Wall Street
Journal he was considering nominating her to a second term or
naming his top economic adviser Gary Cohn to the job, and he was
looking at other unnamed candidates as well. But earlier this
month, people familiar with Mr. Trump's thinking said he was
unlikely to pick Mr. Cohn. Ms. Yellen likely will be asked whether
she has discussed the issue recently with White House officials,
including the president's daughter and adviser Ivanka Trump, who
had breakfast with the Fed chief in July.
Write to David Harrison at david.harrison@wsj.com
(END) Dow Jones Newswires
September 19, 2017 13:14 ET (17:14 GMT)
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