As widely expected, the Federal Reserve stood pat on rates but officially announced plans to wind down the balance sheet. Robert Both, Macro Strategist, TD Securities, explains why this matters and what investors should watch going forward.
Thanks for having me, Sara.
So a lot happened today, Robert. What do you take as the most important thing?
So I think the most important thing is that the dot plot still indicates that the Fed thinks they can hike once more in 2017 and three more times in 2018. They did acknowledge that inflation was a little weaker than expected and actually pushed back the date that they expect inflation to hit its target of 2%. But that confidence that they still think they can hike once more is important for the market.
And when you and I were chatting as soon as the announcement came out, you had said, this is a really big deal. What makes it such an important or monumental thing from today's announcement?
Well, the big deal is that they announced that the runoff of the balance sheet will begin in October. Now, this has been telegraphed well in advance, but it is a big deal nonetheless, because it's the first time that a global central bank has reversed QE. So there's a lot of uncertainty around it, but it is one more thing that will help them tighten policy.
So if we put all of these pieces together, we have an announcement to reduce the balance sheet, essentially reduce some of the stimulus since the financial crisis. They've left the door open to a December rate hike. You're pricing in two more, possibly for 2018. When you put all of that together, and you think about the risks in terms of what could derail some of these plans, what are you watching going forward?
So what we're watching going forward is inflation. Any signs that inflation is not stabilizing or continues to drift lower would put the December rate hike into question. As for the balance sheet, the Fed has downplayed the impact this will have on markets. Philadelphia Fed president, Patrick Harker actually said it will be like watching paint dry, so hopefully it won't be too exciting. But we are going to be watching inflation going forward.
Thank you very much.
Thanks for having me.