What to expect from this week's FOMC meeting

Posted September 20, 2017

Shares of mining company Sibanye-Stillwater Gold plummeted after announcing it would issue convertible bonds worth $450 million to refinance a loan partly used to fund its acquisition of US-based Stillwater previous year.

Just as the Fed had never before engaged in a bond-buying spree of such magnitude, it has never attempted to shrink a portfolio that is now roughly five times its size before the financial crisis.

The balance sheet grew as the Fed began QE in late 2008, during the worst of the financial crisis and the Great Recession.

Every US President gets the chance to influence Fed policy through nominations to the central bank's Board of Governors.

It was thought that 2017 would be the break-out year for rising prices. Instead, the financial markets will dissect the latest commentary from Fed officials on the state of the USA economy, and perhaps its greatest concern - a persistent lack of inflation.

No Fed officials dissented on the decision. The Standard & Poor's 500 index of stocks has risen just 0.08 percent ahead of the Fed announcement at 2 p.m.

Policymakers have been divided in recent months on the near-term threat of inflation, with some arguing the central bank should be patient before raising rates again. Stock market prices soared during the three QE stages, though economic growth otherwise was comparatively lackluster and coincided with the slowest recovery since the Great Depression. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance. Portugal's bond yield also continued to fall after the country regained its investment grade rating, to trade at 2.362% from 2.459% Monday.

"Even though inflation is now somewhat below our longer-run objective, I judge that it is still appropriate to continue to remove monetary policy accommodation gradually", Dudley said.

The issue of when and how the Fed will manipulate its main policy lever - its target for short-term rates - in coming months is less clear.

With inflation still below the Fed's target range, how can she justify a December hike and three more next year?

"Downgrades to the infamous dot diagram could complicate Yellen's efforts to convince markets they are too complacent", these economists warned.

In addition to forecasting future rate hikes, analysts are trying to divine whether President Donald Trump will re-nominate Yellen to a second four-year term.

Any potential rate hike would likely occur at its last meeting in December. The Fed is expected to gradually reduce this program over the next few years.

Some banks are expecting the Federal Reserve to announce that QT will begin in October, but the pace will still be a key detail.

'We expect that the median projection for 2017 will still be for one more 25bp rate hike in December.

ANALYST'S TAKE: "On the political front, no prizes for guessing that North Korea will top the agenda of President Trump's address to the gathering of world leaders at the U.N.", Rob Carnell of ING said in a report.

The problem is that interest rates, which the Fed influences through its federal funds rate, remain low even though jobs recovered years ago.

Inflation has been persistently low but Yellen could dismiss this as transitory and point to recent stronger-than-expected data on consumer prices.

Here, for example, is the dot plot from June of this year.