FOMC Hikes Rates as Expected, Details Balance Sheet Normalization

As was expected, the Federal Reserve’s (Fed) policymaking arm, the Federal Open Market Committee (FOMC), raised rates by 0.25% (25 basis points) at the conclusion of its two-day meeting. This is the fourth rate hike in this cycle, and brings the fed funds target range to 1 – 1.25%. Here is a side-by-side comparison of the statement released today versus the statement released at the last FOMC meeting on May 3, 2017.

The FOMC also released a new set of “dot plots” at today’s meeting, along with additional forecasts from members; however, the most substantive change in the Fed’ statement related to the potential for balance sheet normalization later this year. This was the first statement where the FOMC explicitly mentioned reducing the size of the balance sheet (though they did prepare markets with some discussion in their May meeting minutes), and they also included an addendum that describes how this program will work. In short the Fed intends to gradually reduce the size of its balance sheet by decreasing reinvestment of principal payments from maturing bonds, starting with a cap of $10 billion per month ($6 billion for Treasuries and $4 billion for Mortgage Backed Securities [MBS]). This cap will increase by $10 billion every three months until reaching a maximum of $50 billion.

No significant changes were made to the dot plots, and the median projection of FOMC members continues to anticipate one more 0.25% rate hike this year and three hikes in 2018. On balance, forecasts for GDP growth increased very slightly for 2017, while forecasts for inflation and the unemployment rate showed a small decrease.

The FOMC statement showed a slight improvement in its view of economic growth (rising modestly so far this year). Household spending was described as picking up in recent months, and business investment continued to expand. The FOMC did state that inflation “has declined recently,” but noted little change in market and survey-based measures of inflation expectations since the May meeting. As it did in the past several statements, the FOMC highlighted that the “near-term risks to the economy are roughly balanced” and noted the committee would “monitor inflation indicators.” However, language regarding monitoring global economic and financial developments was removed.

Fed Chair Janet Yellen was holding her post-FOMC meeting press conference as this blog was being prepared.

 

IMPORTANT DISCLOSURES

The economic forecasts set forth in the presentation may not develop as predicted.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.

The Federal Open Market Committee (FOMC) is the branch of the Federal Reserve Board that determines the direction of monetary policy. The eleven-person FOMC is composed of the seven-member board of governors, and the five Federal Reserve Bank presidents. The president of the Federal Reserve Bank of New York serves continuously, while the presidents of the other regional Federal Reserve Banks rotate their service in one-year terms.

Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.

All indexes are unmanaged and cannot be invested into directly.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond and bond mutual fund values and yields will decline as interest rates rise and bonds are subject to availability and change in price.

Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.

Mortgage-backed securities are subject to credit, default, prepayment risk that acts much like call risk when you get your principal back sooner than the stated maturity, extension risk, the opposite of prepayment risk, market and interest rate risk.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Securities and Advisory services offered through LPL Financial LLC, a Registered Investment Advisor

Member FINRA/SIPC

Tracking # 1-617647 (Exp. 06/18)