The US Federal Reserve decided to raise interest rates above 1 percent. The last time interest rates were at this level was at the end of 2008, just before the large rate reduction that left them at 0 percent.
The Fed has also established a plan to divest the assets it has accumulated during the crisis to support the US economy. The new benchmark range is between 1% and 1.25%. This is the fourth increase in the process of withdrawal of monetary stimuli.
A few questions: What is the strategy of the withdrawal of stimulus from the FED? What will balance reduction mean? What are the great barriers that Yellen faces? What will Yellen’s future be in front of the Fed?
One step closer to the withdrawal of stimulus from the US Federal Reserve.
The first rate hike came in late 2015, so they didn’t really play out until the end of the following year, 2016, and there was another interest rate change in March this year. The members of the FED see a new increase possible before the end of this year, marking yet another effort to a reduction of the balance.
Janet Yellen, President of the Fed, insisted that the process of stimulus withdrawal, which began more than a year and a half ago, will be gradual.
To this must be added the wait to see if there is some kind of fiscal impulse that were raised within the proposals of the campaign of Donald Trump, which would give even more scope. The big question right now is how the market would react to the downsizing.
The US Federal Reserve accumulated assets worth $4.5 trillion, largely public debt. Until now, what has been done is to reinvest it in the purchase of more bonds as they matured.
This is a strategy similar to that followed with the bond purchase program. Initially, it will start with $6 billion in public debt and $4billion in mortgage bonds each month.
These limits can be increased gradually every quarter, up to a maximum of $50 billion between public debt and mortgage bonds. It has been suggested that this process will take several years.
The process of reducing the balance will start as soon as possible
The Federal Reserve’s balance sheet was around US $1 trillion before the start of the crisis in 2008. Yanet Yellen has avoided specifying when the downsizing will begin.
Yanet Yellen explained that the process would begin as soon as possible. Its intention is that the whole process be done in a meticulous and discreet way to allow for a constant evaluation of the situation.
At the beginning of the year, it was established by all members who agreed with the approach that is being proposed at the moment. The objective that was proposed is that the process be done gradually.
We want to reduce the balance in order to avoid tensions in the markets that may cause unexpected rebounds. Also an analysis of the situation, the Federal Reserve certifies that the moderation of growth at the beginning of the year is temporary and considers that the economic data evolve according to what has been predicted.
The forecast for growth for 2017 is 2.2 percent. Unemployment has reduced to 4.3 percent, the lowest level for almost 2 decades. The Federal Reserve has indicated that the labor market continues to improve.
Janet Yellen’s dilemma: inflation and low long-term rates
Inflation has moderated for the second time in 3 months. Prices have fallen one tenth last month. The annual rate of inflation has fallen to 1.9 percent. Four months ago, it was at 2.7 percent.
The inflation situation creates a dilemma for Janet Yellen in establishing a strategy to follow and imply that the rate increase will not be so automatic as of now.
Janet Yellen has justified the decision to raise interest rates on the basis of progress in both consumption and investment. It has anticipated that the economy will continue to expand at a moderate pace and that the labor market will be strengthened. Inflation is expected to rise and stabilize around 2 percent.
The second dilemma she is facing is the low long-term rates, which have moved around 2.1 percent for 10-year bonds, and all while the Wall Street Stock Exchange performs well, despite the recent tech sell off.
On the other hand, the currency market is also reflecting the possibility of a pause, with the US dollar shifting to the lowest level since October 2016 with respect to the basket of foreign exchange.
The future of Janet Yellen in the hands of Donald Trump
Janet Yellen’s future in the United States Federal Reserve is increasingly intriguing Wall Street investors.
Donald Trump, who is in charge of appointing the president of the Fed, is silent on what his decision will be and that creates uncertainty, because this neutral position contrasts with the charges he made against her in his campaign for the presidency.
Janet Yellen’s term comes to an end in January 2018. Donald Trump did not rule out publicly that he could propose her to keep her at her post. But if not, this will be her last public appearance before a successor is known. The most feasible alternative to her succession would be Gay Cohn, his economic adviser.