Fed Watch: All Eyes on Yellen

This week’s Federal Reserve Open Market Committee (FOMC) meeting will be anything but boring. The Federal Reserve seems eager to move toward rate and balance sheet normalization, probably because President Trump is unlikely to nominate Fed Board Chair Janet Yellen for another term when her current term expires in January. I expect Yellen and her colleagues to take the following steps forward this week:

1. Raise Rates

I expect the Fed to raise policy rates by 25 basis points at the meeting. I’m not alone―of the 100 private-sector Fed watchers polled by Bloomberg, only 5 predicted no change in rates. Additionally, the market seems to be pricing in nearly a 100% probability of a rate hike.

Despite recent weakness in some economic indicators, as well as still-soft inflation, I think the Fed will move forward with an increase. I think it views the data as flukish and I doubt it will be much of a deterrent.

2. Address the Balance Sheet

The big issue is the balance sheet, which the Fed will likely announce plans to start reducing. While we probably won’t get a detailed plan this week, I think the Fed is eager to communicate its intention to the market. I think the actual move to shrink the balance sheet will begin this fall and it will be incremental and gradual. The last thing the Fed wants is a re-enactment of the 2013 “taper tantrum.”

3. Refresh the Dot Plot

The Fed will also release an updated Survey of Economic Projections, including a fresh “dot plot,” which signals the Fed’s outlook for the path of interest rates. Many investors seem skeptical about how much the Fed will actually tighten in the current cycle, especially since FOMC members have widely disagreed on the topic in past years. Hopefully, the updated dot plot will give investors firmer guidance.

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