Fed holds interest rates and announces normalization of balance sheet next month

Federal Reserve policymakers voted to hold overnight interest rates unchanged at between 1.00% and 1.25% in line with expectations in today's Federal Open Market Committee meeting, while announcing the start of the process to normalize the balance sheet from October.  

FOMC members pointed to the data available to the Committee since the July 25-26 meeting, as the labor market kept improving while economic activity accelerated, as labor gains tightened a bit while remaining solid in the medium term, and the unemployment steadied in their almost record lows. 

Members said household spending rose in recent month, as fixed-rate investment stabilized, while inflation gauges in the last 12 month moved away from the bank's long-term 2% target, while still below that target when excluding energy and food prices.

Members asserted the Committee's commitment to boost job opportunities and stabilize prices, noting that recent hurricanes Harvey, Irma led to widespread destruction and hardship for many people, with the impact expected to weigh on economic growth in the short term. 

However, members said that previous experiences with hurricanes point to a transient impact at best in the medium term, so they still project gradual tightening of the monetary policy to allow the economy to expand moderately.  

They also expect bumps in petrol prices alongside some other items after the hurricanes, which would lead to a temporary rise in inflation, but otherwise, inflationary pressures are still expected to steady below 2% in the medium term, while considering short-term risks as roughly balanced, as the Committee continues to monitor inflation gauges and global economic and financial developments closely. 

As of 07:39 GMT, the dollar index, tracking the greenback against a basket of currencies, surged to 92.40 from the opening of 91.79, with an intraday high at 92.48, and a low at 91.53.

Similarly, members said that taking into consideration the labor conditions and current inflation rates, the Committee decided to hold interest raters into the range of 1% to 1.25 percent, while keeping the monetary policy accommodative, offering further support to the labor sector and nudging inflation firmly towards 2%. 

The Committee said it's assessing the current and projected economic conditions, with an eye towards achieving its targets of full employment and 2% inflation, while taking into consideration a wide group of data and economic information, including the labor market conditions and inflation indices. 

Members expect the economic conditions to develop in a way that allows for gradual tightening of the policy, with a path that ends just below the projected interest rates levels in the long term, while reaffirming that the actual path of short-term overnight interest rates depends on aforementioned economic projections and data. 

Otherwise, the Committee is carrying on its current policy of reinvesting its holdings of debt, mortgage-backed securities, and treasury bills and selling them in public auctions to trim them down from their current high levels in the long term, and in order to keep the financial conditions accommodative.

The FOMC expects to start normalizing the balance sheet from October to cut down on high levels of debt and mortgage-backed securities held by the Federal Reserve, as all the members agreed on the principles of normalizing the policy through the steps detailed in the additional document submitted alongside the usual bank statement in this meeting. 

The Committee wants to cut its monetary holdings gradually by reinvesting them through the open market system, while expecting the treasury bill sales to reach $6 billion at the start of the process, while rising to $30 billion a month in 12 months.

As for mortgage-backed security sales, they will start at $4 billion and advance to $20 billion a month after a year of the process. 

The Committee said that gradual cuts in the bank's debt holdings will trim down the reserve balance to way below recent years, while still remaining above the levels seen before the global financial crisis. 

Members are aiming to change the targeted range for federal money as the main way to change the policy, while standing to downgrade their interest rate target in case economic conditions deteriorated. 

Finally, the Committee asserted it stand ready to use all the tools available to it to increase the balance sheet again if conditions called for heavy easing policies that couldn't be satisfied only with cutting interest rates on federal money. 

In her post-meeting press conference, Fed Chair Janet Yellen said that gradual increases for interest rates are still on the table, noting that an inflation slowdown this week doesn't reflect the overall economic developments and shouldn't be considered a risk. 

Yellen said the FOMC will continue monitoring inflation and labor data, noting that if the data diverted too much from the Committee's projections, it will take the necessary decisions to mend the situation, while adding that she expected the inflation softening to be transient. 

Yellen said that the FOMC doesn't want to go past the specific economic targets, for it will force the Fed to accelerate its pace of policy tightening and raise the risks of recession. 

Finally, Yellen noted that the Committee expects economic growth to be strong enough to allow for gradually policy tightening and interest rate hikes in a gradual manner, while refusing to give specific promises for the trajectory of interest rate changes.