Janet Yellen “the Hawk” And The Fed Deliver

John M. Bland, MBA

Janet Yellen, the unlikely hawk On Wednesday the Fed took a more hawkish policy stance than the markets were expecting. As expected, the Fed Funds target range was held steady at 1.00-1.25%. However, the central bank hinted at a tightening bias for the December 13 meeting. Also, as expected, the Fed announced that it would start to unwind its massive investment portfolio in October.

The vote was a unanimous 9-0 and the policy statement indicated that risks to the economy remain toughly balanced . The surprise was that a December interest rate hike remains in play. This decision remains data dependent. Weaker than expected growth or soft inflation data could derail a future rate hike . Fed Fund futures see an end of year rate hike as about a coin toss. In recent years, the markets have been better forecasters of Fed policy than the Fed itself! The Fed also forecasted three further interest rate rises in 2018.

The major item was the balance sheet reduction timing. The reduction will be modest at the start and then grow. The plan is to reduce gradually the reinvestment of maturing holdings rather than making outright sales of securities. The initial decline of securities holding will be up to USD 6bn per month in U.S. Treasury bonds and USD4bn in mortgage backed securities. Levels will be raised at three-monthly intervals to eventually reach a cap of USD 30bn and USD20bn per month, respectively. It is felt that the ultimate goal is to reduce their USD 4.5tn portfolio to a new equilibrium level of roughly USD 2.5tn over a period of two to three years.

Markets had been set up for a Fed tapering before the Fed announcement on Wednesday, but were surprised by the aggressive posture on interest rates going into the end of the year. As a consequence, markets pushed the USD higher into the close. By the time Thursday rolled around, traders were marking the USD back lower again once the yield on the 10-yr note adjusted back lower slightly. It will take an ongoing flow of positive U.S. economic data to sustain the USD gains and higher interest rates. One thing to consider is that Hurricanes Harvey and Irma will tend to cloud economic data over the next several weeks, making economic data difficult to read. Worth noting, several top Fed officials say they feel the impact from the storms will only be transitory. In my opinion, improving data from Europe will continue to support the EURUSD exchange rate. There is little doubt that German Chancellor Merkel will prevail in elections over the weekend.

Amazing Trader EVENT RISK Calendar:

Sun 24 Sep
All Day German Elections
Mon 25 Sep
08:00 DE- IFO Survey
Tue 26 Sep
14:00 US- New Homes Sales
14:00 US- CB Confidence
Wed 27 Sep
12:30 US- Durable Goods
14:00 US- Pending Homes Sales
14:30 US- EIA Crude
Thu 28 Sep
12:30 US- GDP
12:30 US- Jobless Claims
Fri 29 Sep
09:00 EZ- flash HICP
12:30 US- Core PCE deflator
14:00 US- University of Michigan final

Be sure to refer daily Global-View to see the continuously UPDATED Economic Calendar and the Forex Forum for the complete list of key items (actual data, selected charts, etc.) as they are released.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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