Banking and Finance Law Daily Wrap Up, FEDERAL OPEN MARKET COMMITTEE—Fed to begin shrinking balance sheet in October; ‘funds’ rate unchanged, (Sep 20, 2017)
Based on information it has received since it last met in July 2017, the Federal Open Market Committee stated that it will initiate its "balance sheet normalization program" in October 2017. The program will "gradually reduce the Federal Reserve’s securities holdings by decreasing reinvestment of principal payments from those securities." In addition, the FOMC unanimously decided to maintain the target range for the federal funds rate at the 1-percent to 1.25-percent range. Further, the Committee noted that "economic activity has been rising moderately so far this year."
The FOMC noted that the unemployment rate has "stayed low." Likewise, on a 12-month basis, inflation and the measure excluding food and energy prices have declined overall as well.
Economic outlook. The FOMC reported that job gains have "remained solid in recent months." Household spending has been expanding at a moderate rate," and growth in business fixed investment has "picked up in recent quarters." According to the FOMC, inflation has been running "below 2 percent." While market-based measures of inflation compensation "remain low," survey-based measures of longer-term inflation expectations "are little changed, on balance." The Committee will continue to monitor inflation developments closely.
Based on its findings, the FOMC indicates that near-term risks to the economic outlook appear "roughly balanced." At the same time, the Committee continues to expect that, "with gradual adjustments in the stance of monetary policy," economic activity will expand at a "moderate pace," labor market conditions "will strengthen somewhat further," and inflation is expected to remain somewhat below 2 percent in the near term but will "stabilize around the Committee’s 2 percent objective over the medium term."
In communicating its economic outlook, the FOMC released charts and graphs depicting its economic projections.
Asset purchases. Notably, the FOMC will begin implementing its balance sheet normalization program in October. As previously depicted in the June 2017 Addendum to the Committee’s Policy Normalization Principles and Plans, the program is designed to "gradually reduce the Federal Reserve's securities holdings by decreasing reinvestment of principal payments from those securities."
In keeping with the initiative, the FOMC also made available its "Statement Regarding Reinvestment in Treasury Securities and Agency Mortgage-Backed Securities."
Federal funds rate. In view of realized and expected labor market conditions and inflation, the FOMC decided to maintain the federal funds rate at the 1- to 1.25-percent range. In connection with future determinations of the timing and size of an adjustment, the Committee "will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation." According to the FOMC, this assessment "will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments."
Primary credit rate. The primary credit "discount" rate is the interest rate charged for short-term credit extensions to depository institutions. As reflected in its Sept. 20, 2017, "Decisions Regarding Monetary Policy Implementation," the Fed voted unanimously to approve the establishment of the primary credit discount rate at its existing level of 1.75 percent.
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