Fed Sets Stage for December Rate Hike

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Published Date 9/20/2017

To a large extent, the FOMC policy statement was a re-hash from the last meeting. The markets largely expected the Fed would officially announce that it will begin to unwind its $4.5 trillion balance sheet. The FOMC said beginning in October the Fed will roll over the principal payments from the Federal Reserve's holdings of Treasury securities maturing during each calendar month that exceeds $6B, and to reinvest in agency mortgage-backed securities the amount of principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during each calendar month that exceeds $4B. That is what the Fed has been saying since its June addendum.

Key points in the policy statement:

The labor market has continued to strengthen and that economic activity has been rising moderately so far this year.
On a 12-month basis, overall inflation and the measure excluding food and energy prices have declined this year
Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
Hurricanes Harvey, Irma, and Maria have devastated many communities, inflicting severe hardship. Storm-related disruptions and rebuilding will affect economic activity in the near term,
Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.
The Committee decided to maintain the target range for the federal funds rate at 1 to 1-1/4 percent.
The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.

As for another rate increase in Dec, Fed officials are divided; some want an increase, others believing inflation is low and don’t want another increase. The Fed is expecting a move to 1.4% for the federal funds rate which indicates an increase in Dec. Continued focus on the Fed with Fed officials hitting the rubber chicken circuit beginning tomorrow with three regional Fed Presidents (Williams (SF), George (KC) and Kaplan (Dallas).

Tomorrow weekly jobless claims expected at 303K +5K from the prior week. The Sept Philadelphia Fed business index (18.0 from 18.9 in August. July FHFA home price index (+0.4% up from 0.1% in June, very dated data).

The bellwether 10 hit 2.28% this afternoon solidly cutting above the next level of chart support at 2.23%. Our outlook turned bearish over a week ago. The next technical support for the 10 is at 2.32%, then 2.40%. The 2 yr note yield now the highest since 2008.

Source: TBWS

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