The Federal Reserve announced on Wednesday that their balance sheet ‘normalisation’ programme will begin in October. Back in August I predicted that they would officially announce the scheme in September and keep interest rates unchanged. This is exactly what materialised.
Some details from Wednesday’s announcement include:
- A $10 billion a month run off of treasuries and mortgage backed securities
- This will increase by $10 billion a quarter to a maximum of $50 billion a month
- By this time next year, the Fed will be on course to reduce their balance sheet by over $500 billion a year
- No time scale was put on how long the balance sheet reduction programme will last
Of note also is how twelve out of sixteen on the FOMC envisage a third rate hike before the end of 2017 (this will almost certainly occur in December), and how eleven out of the sixteen estimate three further rate hikes in 2018.
During Janet Yellen’s press conference she confirmed that the committee was,
prepared to adjust monetary policy as needed to achieve its inflation and employment objectives over the medium term.
She also stated that the Fed would only consider resuming asset purchases if a,
material deterioration in the economic outlook were to warrant a sizeable reduction in the federal funds rate.
In plainer English, this means that the repurchasing of assets would only take place if the Fed were to CUT interest rates. This is important because the expectation amongst may economists is that the Fed is only trimming its balance sheet and raising rates to leave room for future rate cuts and the reinvestment of assets in the event of an economic downturn. What these same economists are discounting is the danger of the next crisis (which has been building over the past decade) being a currency led phenomenen. Looking at developments both geopolitically and economically, there is the very real prospect now that when the crisis becomes widely recognised, it will have a destructive impact on the U.S. dollar. Perhaps to such a degree that inflation will rise as a result and the Fed will then raise rates under the rationale of trying to control it and support the dollar.
The question remains on how economic decline will be synchronized with events on a geopolitical level. The brewing conflict with North Korea is one possible trigger, as is the prospect of Donald Trump reneging on the Iranian nuclear agreement. He plans to make an announcement on this in October, the same month the Fed begins selling assets. The likes of CNBC have already posited how a collapse of the agreement could ‘roil energy markets‘. CNBC went further by saying:
A U.S. pullout could have major market impacts because U.S. sanctions can be applied to entities that do business with Iran. That effectively establishes a chilling prospect: Re-engage with Iran and you’ll be frozen out of the U.S. market.
As a consequence, a reduction in global oil supplies coupled with notable price increases would likely result in higher inflation, which over time would give the Federal Reserve further ammunition to carry on raising rates.
- The Federal Reserve moved to dismantle a pillar of crisis-era support for the world’s biggest economy and stuck with its forecast to raise interest rates again this year, saying hurricane damage won’t derail an otherwise healthy expansion.
- In the statement, the Fed set October for the start of their previously announced plan to shrink its $4.5 trillion balance sheet. As expected, policy makers left the benchmark interest rate unchanged in a range of 1 percent to 1.25 percent.
- The Fed said the balance-sheet runoff would follow the framework released in June: $6 billion in Treasuries and $4 billion in mortgage-backed securities per month, rising every three months until the amounts reach $30 billion and $20 billion per month, respectively. The Fed anticipates ending the runoff at some point, though it doesn’t yet have a specific date.
- Back-to-back major hurricanes, a holiday weekend and higher interest rates combined to bring a 9.7 percent drop in total mortgage application volume last week from the previous week.
- The Mortgage Bankers Association’s seasonally adjusted weekly read was also 21.5 percent lower than the same week one year ago.
- Applications to refinance a home loan and purchase a home fell sharply, with those applying to purchase falling 11 percent for the week. They were barely 1.9 percent higher from the same week a year ago. This is the lowest annual growth rate since April.
- Refinance applications fell 9 percent for the week and are down 35 percent from a year ago, when rates were lower.
- Britain’s consumers continued spending after the summer sales, despite the steepest annual growth in non-food store prices in almost three decades.
- Growth in retail sales volumes rose by 1% in August after the Office for National Statistics revised the figure for July up to 0.6%, beating analysts’ expectations for an increase of 0.2%. The pound leapt against the dollar on the figures, which add weight to a potential rate hike by the Bank of England for the first time in a decade.
- Spending in clothing stores continued, the ONS said, despite price increases after the end of the busy summer period, likely to be as a result of sales promotions ending. Footwear stores also fared well in the back-to-school shopping season.
- President Donald Trump is leaning toward decertifying the Iran nuclear deal and putting the decision of whether the United States withdraw from the accord in the hands of Congress, according to four sources — including a senior administration official — familiar with the White House deliberations.
- Such a move would come before an Oct. 15 deadline and would trigger a 60-day window for lawmakers to determine whether to reimpose sanctions related to Iran’s nuclear program that were lifted as part of the 2015 agreement. The president’s goal during that time is to prod America’s European allies, who are part of the nuclear deal, to agree to renegotiate some provisions and pressure Iran back into talks.
- Russia branded U.S. President Donald Trump’s hostility toward the Iranian nuclear agreement as “very worrying,” vowing to do everything it can to protect the pact.
- “We will defend this document, this consensus, which was met with relief by the entire international community and strengthened both regional and international security,” Russian Foreign Minister Sergei Lavrov told reporters in New York Tuesday after meeting U.S. Secretary of State Rex Tillerson on the sidelines of the United Nations General Assembly.
- Russian President Vladimir Putin has instructed the government to approve legislation making the ruble the main currency of exchange at all Russian seaports by next year, according to the Kremlin website.
- According to the head of Russian antitrust watchdog FAS Igor Artemyev, many services in Russian seaports are still priced in US dollars, even though such ports are state-owned.
- Artemyev said the decision will force foreigners to buy Russian currency, which is good for the ruble.
- The Prime Minister told the UN General Assembly in New York the organisation must change in order to “meet the challenges of the 21st century”.
- Mrs May said: “Those of us who hold true to our shared values, who hold true to that desire to defend the rules and high standards that have shaped and protected the world we live in, need to strive harder than ever to show that institutions like this United Nations can work for the countries that formed them, and for the people who we represent.”
Washington Post: Trump pushes reform in United Nations debut, calls for ‘changing business as usual’
- President Trump called on the United Nations to enact reforms to the world body, pledging Monday in his debut here at the annual General Assembly meetings that he and his administration will be “partners in your work.”
- “We encourage all member states to look at ways to take bold stands at the United Nations with an eye toward changing business as usual and not being beholden to ways of the past which were not working,” Trump said, flanked by U.N. Ambassador Nikki Haley and Secretary General António Guterres.