As expected the Fed will begin balance sheet reduction in October. The Fed penned in one more rate hike in December as its FOMC statement shows the hurricanes will have no lasting effect on anything.

Hurricanes Harvey, Irma, and Maria have devastated many communities, inflicting severe hardship. Storm-related disruptions and rebuilding will affect economic activity in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term.

Higher prices for gasoline and some other items in the aftermath of the hurricanes will likely boost inflation temporarily; apart from that effect, inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

In October, the Committee will initiate the balance sheet normalization program described in the June 2017 Addendum to the Committee’s Policy Normalization Principles and Plans.

Dot Plot Shows One More Hike

For the rest of the year, the Dot Plot shows four FOMC participants expect no more hikes, one expects two more hikes, and eleven expect one more hike.

Dot Plot April 2017

In April,  7 participants thought rates would be 2.25% or higher by the end of 2018. Today,  only 5 participants think so. The top expectation for 2018 was 3.25% to 3.5%, today it’s 2.5% to 2.75%.

In April, the top expectation for 2018 was 3.25% to 3.5%. Today it’s 2.5% to 2.75%.

Watching Paint Dry

Reuters reports comments on the Portfolio Drawdown in October.

Financial markets were barely moved by the Fed decision and the new economic projections and based on the immediate market reaction it looked as if the Fed was right when it said that the portfolio runoff would be as exciting as “watching paint dry”.

Rate Hike Odds

As noted by CME Fedwatch, rate hike odds were 46.8% a week ago and spiked to 65.6% today.

I doubt the Fed gets in that hike. Regardless ….

Mike “Mish” Shedlock