In line with expectations, the Fed increased its target funds range to 1-1.25 percent at the end of the two-day FOMC meeting. The accompanying statement stresses that monetary policy "remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation".
The statement leaves little room for doubt that the Fed expects to raise rates further, though it stresses that the timing and extent of any future increases will depend on the data flow, particularly as regards employment and inflation. However, "the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run".
For now, the Fed is continuing to reinvest the principal amounts of the bonds it acquired during its QE program as they mature. However, it intends to start a program of normalization of its balance sheet before the end of this year, assuming the economy evolves as expected. To this end, it released today a brief but informative document on how this process will work. (Answer: slowly.) Downsizing the balance sheet is likely to prove a lot trickier than returning interest rates to more normal levels, a fact that the Fed clearly recognizes: "The Committee expects to learn more about the underlying demand for reserves during the process of balance sheet normalization".
The Fed is at pains to stress that is not about to take away the markets' punchbowl entirely. It expects that its balance sheet, at the end of the normalization process, will be larger than it was before the financial crisis and QE. It also reassures the market that the Fed will be willing to re-commence securities purchases at any time in the future, if it deems that such a step is necessary to support the economy. Things may be very slowly heading back towards "normal", but evidently normal isn't what it used to be.
No comments:
Post a Comment