Analyzing the Fed: What Happens Next?

Federal Reserve | GoRion Blog

After a two-month hiatus, the Federal Reserve resumes its policy meetings next week in Washington. Although no change in monetary policy is expected, officials could outline preliminary plans to begin unwinding their massive $4.5 trillion balance sheet.

The Federal Reserve is unlikely to surprise the markets next week when its policy board meets to decide whether to raise interest rates. Although no rate change is expected, the upcoming meeting is of paramount importance for the markets.

For starters, it will be the last to hold a press conference until the December 12-13 meeting. There is another Fed meeting scheduled for October 31 and November 1, but no press conference will be held. Central bank pressers normally provide clues about the future path of monetary policy.

Secondly, next week’s policy decision will be accompanied by quarterly economic projections covering GDP, unemployment and inflation. The U.S. economy is coming off a second quarter of better than expected growth, which could prompt an upward revision to the Fed’s GDP estimate.

Finally, the official rate statement could outline the central bank’s plan to begin unwinding its massive $4.5 trillion balance sheet – a process that is expected to begin this year.

The Federal Open Market Committee (FOMC) will kick off its two-day meeting on September 19, with the official rate statement due the following afternoon.

The minutes of the July FOMC meeting, which were released last month, revealed a divided policy board. One side preached caution in a low-inflation environment, while another expressed concern over the price of delaying rate hikes.[1]

Investors are divided on whether there will be another interest rate adjustment this year. CME Group’s 30-day Fed Fund futures prices imply a less than 30% chance of a rate hike in December. Those expectations could change after investors read the Fed’s projection materials next Wednesday, which include policymakers’ now infamous ‘dot plot’ summary of interest rate forecasts.

The mortgage industry has been resilient in the face of multiple rate hikes since December. The 30-year fixed rate mortgage hit another 2017 low last week, according to Freddie Mac. The 30-year rate edged down 0.04 points to 3.78% in the week ended September 7. The 15-year fixed rate mortgage fell by a similar margin to reach 3.08%.[2]

The federal funds rate impacts mortgages indirectly as banks and other lenders pass on the higher costs of borrowing to consumers. Mortgage rates are more directly influenced by the yield 10-year U.S. Treasury Notes, which the Fed has no direct control over. The yield on 10- and 30-year Treasuries fall when investors buy a lot of longer-term Treasury debt. U.S. Treasuries are viewed as a safe-haven against global instability – a feature that has been part and parcel of the investment climate over the past few months.[3]

Recent inflationary trends suggest the Fed could err on the side of caution in the short term as the economy regains momentum. The Trump administration is promising a cocktail of stimulus measures that will support above-trend growth over the long term. Earlier this year, the White House unveiled a preliminary tax plan that analysts described as the most ambitious overhaul in the nation’s history. White House economic adviser Gary Cohn says tax reform could still happen this year.[4]

[1] Jeff Cox (August 16, 2017). “Fed minutes: Central bank split over path of rate hikes.” CNBC.

[2] Freddie Mac (September 7, 2017). “30-Year Mortgage Rate Hits Another 2017 Low.”

[3] Taylor Tepper (June 12, 2017). “Why Mortgage Rates are Falling Even As the Fed is Raising Interest Rates.” Time.com.

[4] Demetri Sevastopulo, et al. (August 25, 2017). “Trump to push for tax reform passage by year’s end, says Cohn.” Financial Times.

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This article has been exclusively written for GoRion by...

Sam Bourgi

Sam Bourgi

Sam Bourgi has more than seven years of progressive experience in economic analysis, market research, public policy and the financial markets. He has a broad expertise in the financial markets, including commodities, real estate the foreign exchange. As a published author in both peer reviewed and industry research, Sam has covered topics ranging from mortgage-backed securities to consumer spending and labor. Sam's resume includes more than 40 government and industry publications, thousands of financial articles and hours of educational resources on personal finance and trading.

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