7 days of Economics: And the question now is “When”?
- The Fed increases the Fed Fund Target rate
- It announces plans to downsize its securities holdings
- Meanwhile, inflation keeps on slowing down…
This week, the FOMC increased the Fed Fund Target by 25 basis points, in the 1.00%-1.25% fluctuation range. But the main story about the June meeting was the detailed plan for the first step in the balance sheet normalization process. It was already known that, in order to reduce the Fed’s holdings of Treasuries and Agencies (bought during the three waves of quantitative easing), the US central bank would stop seizing to reinvest maturing securities.
We heard on Wednesday that the Fed would first decrease the amount of reinvestment. Each month, some securities do mature; the Fed used to reinvest all payments; soon, it will reinvest those payments only if they do exceed pre-set (and gradually rising) caps.
At first, these caps will be set at USD 6 bn for Treasuries and USD 4 bn for Agencies, caps that will be raised each month until they reach USD 30 bn and USD 20 bn, respectively. The unanswered question is the date at which this will be launched. According to the statement this will be started once the “normalization of the level of the federal funds rate is well under way”, a qualitative and vague date that Janet Yellen said she did not want to clarify. In short, the Fed is willing to retain as much flexibility as possible, as it may have to change plans were the economic outlook to deteriorate / improve unexpectedly. The uncertainty is mainly about inflation.
As for now, the Fed decided to shrug off the recent deceleration in inflation: during her press brief, Janet Yellen said this was mainly due to “one-off reductions incertain categories of prices, such as wireless telephone services and prescription drugs”. That diagnosis may change. Sure enough, there is a lot of truth in Janet Yellen’s analysis. Still a deceleration in service prices, and even more a drop, is anything but the sign of a dynamic demand…