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FOMC on Track for December Rate Hike

22 September 2017

It's 2 p.m. ET as we begin to write this column, and the Fed has just weighed in with its mid-month pronouncements. USA share prices recovered quickly from initial losses following the Fed's announcement, with the S&P 500 .spx ending slightly higher, adding to a string of closing records.

The Australian dollar was the biggest mover on the day, falling 1.1 percent to $0.7941. I would guess that the program reversal will last three years and conclude with a balance sheet of around USD3 trillion, which suggests that about USD1.5 trillion worth of United States treasury and mortgage-backed bonds will be sold by the end of 2020 and this would most likely have little market impact especially as the world has stopped deleveraging and the global recovery is strengthening.

The Committee will begin implementing a balance sheet normalization program beginning October in a manner described in the June report.

However, if we look into the sector performance, we can see USA financials have performed fairly well.

Despite subdued inflation, the Fed remained firm on raising the policy rate. However, committee's forecasts caused a powerful wave of dollar growth immediately after the publication.

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The greenback was steady at 111.57 yen, below its eight-week peak of 111.87 set earlier Tuesday. That is, how can you square of an economy with little spare capacity with forecasts of even lower unemployment (-0.1% to 4.1% in 2018 and 2019) possibly have less inflation (-0.2% in 2017 to +1.5% and -0.1% in 2018 to 1.9%)? Indeed, they don't expect to hit the 2% target until 2019, which is fortunate in a way as it provides them with nearly maximum optionality about the pace and nature of the policy tightening cycle which started in 2015.

Improvement in the labor market strengthened, economic activity rising moderately.

Inflation measured on a 12-month basis has declined this year.

"The lack of inflation likely helped push the Fed to reduce the long-run target for its funds rate". Now the economy has improved and the unemployment rate has fallen below 4.5%. However, in our experience, the info we're quoting seems to be in line with Fed perceptions of reality.

The pan-European FTSEurofirst 300 index closed up 0.1 percent, while MSCI's gauge of stocks across the globe gained 0.20 percent. 49% of stocks were higher on the day, so breadth is hardly inspiring. The median dot plot continued to project one more rate hike this year, followed by three more increases in 2018. "In addition, we note that salaries are still stagnant". However, the Fed has turned more upbeat over the economic environment otherwise. The average American working stiff has spent a couple of decades at least enduring utterly stagnant wages and the attendant lack of buying power. Moreover, there could be increased demand for these maturing securities as the Fed embarks on a rate hike path. "The bond markets have fairly strong conviction that low inflation and low growth will persist", said Hiroko Iwaki, senior strategist at Mizuho Securities.In the currency market, the rise in Treasury yields boosted the dollar's attractiveness. To a point, that's actually what the Fed professes to want. The Fed's view also prompted rotation into financial shares, which benefit from higher interest rates, from tech shares, he added.

FOMC on Track for December Rate Hike