The FED is considering to raise interest rates soon and tighten monetary policy. This is coming on the heels of positive new information on the U.S. economy. A rise in rates would help the economy to achieve further growth and relieve investor fears.
The FED’s Move
One of the tools they intend to employ is the reduction of their bond holdings. This is in an effort to reduce their $4.5 Trillion balance sheet, however they will accomplish this not by selling off bonds but rather by letting the securities mature. According to the Federal Reserve minutes they would in the short term keep the balance sheet steady and allow the securities to mature and roll off over-time.
The Economic Environment
Originally the Feds intended to start shrinking their balance sheet in their December meeting but clearly there has been a change. The FEDS are now more confident than ever that this is the right time and will be commencing the economic exercise immediately. What has changed is the employment figures, the TRUMP post election boost in the equities market, projected growth rates and the overall global economic environment. The employment figures are now positive with a net gain of roughly 200 Thousand people employed for the past two quarters. The DOW along with S&P are making record highs; both having grown consistently over the past four days. The OECD has project the U.S. annual economic growth rate for 2017 at around 2.27% while other estimates by industry analysts puts it at an optimistic 2.5% for the year. In addition the annual growth rate is also expected to pick up. With all these factors it is clear that the overall economic environment is positive.
A Rate Hike Coming?
This all points to a possible hike coming soon; possibly as soon as the FED’s June meeting. However many within the FED said that “it would be prudent” to see whether the brief economic slowdown in the past month (particularly in retail) was transitory. If it proves to be so then a Rate Hike is very likely to occur.
The only other obstacle in the way off a Rate Hike is the Inflation Rate. The FED has been slowly trying to reel in inflation to the target 2% in order to make the economy more stable. Inflation fell to 1.8% in march from 2.1% in the previous month. Currently the inflation rate is in flux but it needs to be more stable to allow for certainty in the market place.