One more rate hike likely this year! Key takeaways from US Fed policy

In a widely anticipated move, the US Federal Reserve left the interest rates unchanged, but stuck to its earlier projection of one more rate hike by the end of this year. The Fed has already raised rates twice this year.

It also said that, in October, it would start reducing its approximately $4.2 trillion in holdings of US Treasury bonds and mortgage-backed securities acquired in the years after the 2008 financial crisis.

Noted that the recent hurricanes in the United States would affect economic activity, Fed added that they are “unlikely to materially alter the course of the national economy over the medium term.”

In its policy statement, the Fed cited low unemployment and growth in business investment justifying its decision. “The near-term risks to the economic outlook remained ‘roughly balanced’ but said it was closely watching inflation,” the FOMC statement said.

Adding, Fed Chair Janet Yellen said in a press conference that the central bank was ready to change the interest rate outlook if needed.

Here are the key takeaways from the policy review:

Balancing Act

Even though the Federal Reserve didn’t change the interest rates, the policy statement showed the Fed in a balancing act between low US unemployment low and a recent drop in US inflation.

It noted that, “In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2% inflation.”

“The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data,” the FOMC statement added.

December rate hike possible

The Fed stuck to its earlier projection of one more rate hike this year

New economic projections released after the Fed’s two-day policy meeting showed 11 of 16 officials see the appropriate level for the federal funds rate, the central bank’s benchmark interest rate, to be in a range between 1.25% and 1.50% by the end of 2017, or 0.25 percentage points above the current level, Reuters reported.

Fed bond portfolio to shrink

Sticking to the schedule for normalising balance sheet, Fed said it would start trimming its bond portfolio starting October. It would begin to reduce its approximately $4.2 trillion in holdings of US Treasury bonds and mortgage-backed securities by initially cutting up to $10 billion each month from the amount of maturing securities it reinvests..

The limit on reinvestment is scheduled to increase by $10 billion every three months to a maximum of $50 billion per month until the central bank’s overall balance sheet falls by perhaps $1 trillion or more in the coming years, Reuters reported.

Outlook

While the interest rate outlook for next year remained largely unchanged in the Fed’s latest projections, with three rises envisioned in 2018, the US central bank did slow the pace of anticipated monetary tightening expected thereafter.

It forecasts only two increases in 2019 and one in 2020. It also lowered again its estimated long-term “neutral” interest rate from 3% to 2.7%.