As expected, the FOMC said little that was new in the release of yesterday’s post-meeting policy statement. Yes, there were the obligatory tweaks to the first paragraph regarding current economic conditions and some very modest adjustments to the committee’s view on inflation. And yes, there was a discussion about starting to wind down the Fed’s $4.5 billion balance sheet. But all in all, the statement was a non-event from a market perspective.
On the inflation front, the statement said inflation measures “have declined” and are “running below 2%.” Analysts quickly compared/contrasted this to last month’s assessment, when it said inflation had “recently declined” and was “somewhat below” 2%. Such is life as a Fed-watcher!
Although the changes were subtle, some analysts opined that this month’s characterization of inflation suggests the Fed views inflation as more entrenched and less transitory than it did in June.
The main event in the release, which wasn’t really new, was the statement that the FOMC expects to implement its balance sheet normalization program (i.e. the selling of bonds the Fed holds) “relatively soon.” The general consensus among the Fed-watchers I follow is that the “normalization” will begin at the conclusion of the next FOMC meeting on September 20. The expectation is the Fed will announce that starting in October, it will gradually decrease its reinvestment of principal payments from its securities holdings, in accordance with its previously released Policy Normalization Principles and Plans. And if all goes according to plan (insert hearty chuckle here), the Fed’s “balance sheet” would be back to “normal” in four or five years.
Based on the aforementioned “principles and plans” offered up so far by Yellen’s crew, Ned Davis Research took a look at what the wind down of the Fed’s balance sheet might look like. Although the Fed has not given anyone an exact end target for their plan, NDR expects the Fed “will shrink its balance sheet until the total securities held is the equivalent of 10% to 12% of GDP, or by roughly $2 trillion.”This means the Fed’s balance sheet wouldn’t “normalize before 2021 or after 2022, assuming no recession, of course.
