Fed remains on course

In October the Federal Reserve will start gradually reducing its USD 4,500bn portfolio and thereby scaling back its extraordinary measures implemented after the severe financial market crisis. In addition, the members of the Fed’s Federal Open Market Committee (FOMC) are predicting a further rate hike this year. The justification for this was that the storm damage caused by the powerful hurricanes would only have a temporary impact on the economy. They said that although economic growth could be lower in the short term as a result of the storm damage, past experiences have shown that the path of the economy will scarcely be affected in the medium term. Overall the latest meeting of the Fed’s monetary policy committee was significantly more hawkish than had been expected by market players and it seems that the Fed will remain on course. Nevertheless, one rather gains the impression that the prevailing intention of the Fed is to press ahead as far as possible with the monetary policy normalisation process.

At the press conference Fed boss Yellen stated that in normal times the balance sheet was not an instrument for controlling monetary policy. She said that a change in the balance sheet normalisation process was not planned unless unforeseen occurrences absolutely necessitated it. The head of the Federal Reserve emphasised that the Fed preferred to change key rates should the economic conditions deteriorate. She said that this monetary policy measure was the standard tool and that the Fed could better estimate the effects based on greater experience. She said that she could envisage renewed balance sheet expansion only if the zero interest rate limit was reached and the economy required additional stimulus. As far as the rate hike in December was concerned, the Fed boss admitted that there was a large amount of indecision amongst the FOMC members on this point. Yellen said she was very confident about the vacancies on the Board of Governors and on the question of how and when they would be filled. In contrast, the Fed boss had little to say on the issue of who would be the next chair of the Fed’s top monetary policy committee.

The announcement of the balance sheet reduction is another major step in the direction of a normalisation of monetary policy for the Fed boss. In this context, Yellen has already supervised the end of the extensive bond purchases. Consequently, she has initiated the turnaround in interest rates and raised the key rate to a considerably higher level. Now she has also initiated a reversal of the unparalleled balance sheet increase during the severe financial market crisis. All monetary policy measures have been implemented without having any great detrimental effect on the financial markets. Should Yellen not be nominated for another term in office, she will have at least ensured that her desk has been properly cleared for her potential successor.

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