FINANCIAL REPORT: September FOMC Meeting

The major theme of the financial markets last week was watching and reacting to the September meeting of the Federal Reserve Open Market Committee (FOMC). While no rate hike at the meeting came to fruition, as expected, the announcement that the unwinding of the Fed’s balance sheet will start in October was welcome, as it has been discussed at length for the past several months. While there are caps as to how much of the Fed’s balance sheet can be rolled off during any single month, the numbers for October will be $6 billion in treasuries and $4 billion in agency debts for a total balance sheet reduction of $10 billion per month in October, November and December.

While the combined $30 billion that comes off the balance sheet is a minuscule amount when compared to the overall size of the Fed’s balance sheet ($4.5 trillion), just getting the program started is an accomplishment. Having the balance sheet reduction plan in place leaves the Fed on cruise control for the next Chair if that person is not Janet Yellen. While plans can certainly be changed, they are more difficult to change once they are in place and running.

The September meeting of the FOMC was the biggest news item in the U.S. that impacted the financial markets last week, despite there being very little surprise in the statement regarding the interest rate and balance sheet unwinding program. The September FOMC meeting was also very important because it is one of two meetings at which the Fed releases its projections for the future of interest rates and inflation as well as a trove of other economic data. Chair Yellen held a press conference following the meeting, during which she went through the Fed’s decision and took questions.

One of the most talked about aspects of this latest meeting was the Fed “Dot Plot,” a scatter plot that indicates where each FOMC member thinks interest rates will be in the future. As you can see in the chart below, there were some meaningful changes between the June projections (light red) and the September projections (light blue):

The projections remained the same for 2017, with one more rate hike expected this year, and for 2018, during which three rate hikes are predicted by FOMC members. However, in 2019 and the longer run, expectations came down a little over the June projections, with the longer run projection for interest rates now being 2.75 percent, down from the June prediction of 3 percent. Other changes seen in the data included a slight increase in overall GDP expectations for 2017, a slight decrease in unemployment down to between 4.2 and 4.3 percent and a downward revision to inflation expectations from the range of 1.6 to 1.76 percent down to 1.5 to 1.6 percent.

When all is taken into account, the Fed’s numbers show an expected continuation of the slow growth environment the US economy has been experiencing for the past several years.

The other major headlines last week in the US that impacted the U.S. markets was the revival of the Republican’s healthcare repeal bill. Republicans are once again trying to round up the 50 votes needed to pass healthcare reform, but it looks like the Republicans might ultimately fall short as Senator John McCain came out against the bill, as did at least two other senators. Healthcare stocks in general pushed lower last week as the revival of healthcare reform is largely seen a negative for the sector.

In addition to healthcare reform, Congress is working diligently on tax reform, with small pieces and ideas being floated to the public, but nothing as of yet being concrete about how taxes could be reformed and whether a bipartisan deal could actually be reached.

Peter Johnson

Analyst Peter Johnson provides financial and investment information through Callahan Capital Management in Steamboat Springs, Colorado.