Fed Leaves Rate Unchanged; Balance Sheet Normalization to Commence in October

• Fed Leaves Rate Unchanged; Balance Sheet Normalization to Commence in October

The Federal Reserve on Wednesday left interest rate unchanged at 1.25 percent and announced the unwinding of its $4.5 trillion balance sheet.

The apex bank sees one more interest rate hike later this year and projects a temporary disruption of the ongoing progress due to the Hurricanes.

“Hurricanes Harvey, Irma and Maria have devastated many communities, inflicting severe hardship,” the Federal Open Market Committee said in its statement on Wednesday following a two-day meeting in Washington. “Storm-related disruptions and rebuilding will affect economic activity in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term.”

Policymakers reaffirmed their position that steady economic growth and record low unemployment rate would in the long term bolster inflation rate and further support policy on gradual tightening through interest rate hikes and balance sheet normalization.

Also, the Hurricanes will temporarily aid inflation rate as damages done to refineries would hurt supplies and pressure gasoline costs. On a yearly basis, the inflation rate is expected to remain below 2 percent in the short term but stabilize at about 2 percent over the medium term, according to the Fed.

Again, while the economy expanded by 1.2 percent in the first quarter, the Federal Reserve preferred price gauge climbed 1.4 percent from a year earlier. This, the Fed described ‘roughly balanced’.

“The labor market has continued to strengthen” and economic activity “has been rising moderately so far this year,” the Fed statement said. The FOMC repeated language saying “near- term risks to the economic outlook appear roughly balanced.”

The committee revised up 2017 economic growth forecast from 2.2 percent to 2.4 percent, while core inflation rate is expected to decline from 1.7 percent to 1.5 percent. The unemployment rate is predicted to improve in 2018 and 2019 to 4.1 percent.

Meanwhile, the positive economic projection boosted US dollar attractiveness across the board. Gaining more than 0.3 percent against the pound to trade at $1.3463 from more than a year record of $1.3655 recorded prior to the release. The Euro currency dipped more than 1 percent to $1.1874 from $1.2006.

The committee unanimously agreed to leave federal funds rate unchanged and commence balance sheet runoff in October.