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Municipals end weaker after FOMC leaves rate steady

22 Septembre 2017

But Federal Reserve Chair Janet Yellen said she believes the U.S. economy is ready for less economic stimulus.

U.S. President Donald Trump opened the door to blacklisting people and entities doing business with North Korea, further tightening the screws on Pyongyang's nuclear and missile programs.

Besides, and nearly unnoticed by markets, Fed balance sheet reduction has already and very gradually been taking place through U.S. commercial banks, which have reduced their excess reserves by roughly United States dollars 500 billion since 2014. But he has also said he is considering other candidates, notably Gary Cohn, head of Trump's National Economic Council.

As a effect, we continue to expect two 0.25% Fed funds rate hikes until the end of 2018, namely one in December of this year and one next June. The Bank of Japan is likely to maintain its so-called yield curve control policy, where it targets certain interest rates in the bond market through asset purchases, at Thursday's meeting. We believe that long rates would move up more dramatically if the Fed's current stance was too accommodative, and that current levels support our thesis that the central bank's policy stance may be closer to neutral than many observers believe.

The yield on the USA 10-year was at 2.2192% from 2.2298%.

According to Fed officials' projections, the core PCE index is expected to rise 1.5% this year and 1.9% next year, lower than the 1.7% and 2% forecasts in June.

And the Fed's balance sheet isn't the only one that will be unwinding over the next half-decade; indeed, it's not even the biggest. As the bonds mature, the government pays the face value to the Fed.

US Fed raises rates for second time in three months
Municipals end weaker after FOMC leaves rate steady

Fed officials say they also foresee a slightly slower path for rate hikes in 2019.

"It's very likely to be initially greeted with a collective yawn from markets, if only because it has been so well choreographed", said Aaron Kohli and Ian Lyngen, interest-rate strategists for BMO Capital Markets, in a note to clients.

The Fed has been at pains to avoid a repeat of 2013's "taper tantrum", when its announcement it would start reducing the amount of bonds it bought sparked a sell-off in the financial markets.

Yellen declined to comment on the likelihood of her getting a second term and said she hasn't met the president in some time. After leaving its benchmark rate at a record low for seven years after the 2008 crisis, the Fed has modestly raised the rate four times since December 2015 to a still-low range of 1 percent to 1.25 percent.

But the central bank has been going backward in trying to meet its other mandate of stabilizing prices at an annual inflation rate of 2 percent over time. Quantitative easing has no doubt had some influence on long-term rates, and the market reaction to the upcoming reversal of policy will provide more information on the future course of rates.

By 1600 GMT the rand had weakened 0.2 percent to 13.3375 per dollar, its weakest since August 15.

Under the plan the Fed announced in June, it will start to allow a slight $10 billion in holdings to roll off the balance sheet each month - $6 billion in Treasurys and $4 billion in mortgage bonds.

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Municipals end weaker after FOMC leaves rate steady