After a 7-year period of interest rates of close to zero, the American central bank (the Fed) decided to increase its main federal funds rate in December 2015. The next rate hike happened 1 year later in December 2015, followed by a 3rd rise last March, and a 4th in June.
In June the FED increased the federal funds rate by 25 basis points with the target range now between 1% and 1.25%. The American Central Bank is still expecting to implement another rate hike before the end of the year. In 2018 the main rate should therefore reach around 2.1%, and 2.9% in 2019. In fall, the FED should also concretely start the normalization of its balance sheet.
The U.S. Dollar went down after the FOMC meetings. The EUR/USD currency pair reached its highest level since 2015.
Normalization of the FED’s balance sheet
One of the FED’s goals is gradual and well-communicated monetary normalization to avoid any high volatility in the markets. As confirmed by Chair Janet Yellen, interest rates are expected to increase gradually and the FED’s balance sheet should start improving.
The US central bank seems ready to make a further step in the normalization of its policy by beginning a reduction in its balance sheet, perhaps as early as September. As discussed in our previous analysis, a priority for the FOMC is reducing the Central Bank’s balance sheet, after its large-scale purchases of U.S. bonds in the wake of the financial crisis. This could significantly affect the value of the greenback.
In October 2014, the FED decided to end its Quantitative Easing programme after running up a deficit of USD 4.5 trillion. FOMC members said that they intend to reduce the Federal Reserve's securities holdings to reduce the supply of reserve balances, but there are still divided about when to begin. They explained that they would decrease the “reinvestment of the principal payments it receives from securities held in the System Open Market Account. Specifically, such payments will be reinvested only to the extent that they exceed gradually rising caps”. This balance sheet normalisation plan should be implemented this year if the FED decides that the American economy is evolving as anticipated.
IMF downgraded its American Growth Forecast
As it was recently highlighted by the IMF, President Trump’s plan aren’t detailed enough to be factored into forecasts: “The administration’s budget proposes to reduce the fiscal deficit and debt, to reprioritise public spending, and to revamp the tax system but […] it became evident that many details about these plans are still undecided”.
This reason had a major influence on the IMF recent downgrade: the organization revised down its US growth forecast from 2.3% to 2.1% for 2017.
In June the FED increased the federal funds rate by 25 basis points with the target range now between 1% and 1.25%. The American Central Bank is still expecting to implement another rate hike before the end of the year. In 2018 the main rate should therefore reach around 2.1%, and 2.9% in 2019. In fall, the FED should also concretely start the normalization of its balance sheet.
The U.S. Dollar went down after the FOMC meetings. The EUR/USD currency pair reached its highest level since 2015.
Normalization of the FED’s balance sheet
One of the FED’s goals is gradual and well-communicated monetary normalization to avoid any high volatility in the markets. As confirmed by Chair Janet Yellen, interest rates are expected to increase gradually and the FED’s balance sheet should start improving.
The US central bank seems ready to make a further step in the normalization of its policy by beginning a reduction in its balance sheet, perhaps as early as September. As discussed in our previous analysis, a priority for the FOMC is reducing the Central Bank’s balance sheet, after its large-scale purchases of U.S. bonds in the wake of the financial crisis. This could significantly affect the value of the greenback.
In October 2014, the FED decided to end its Quantitative Easing programme after running up a deficit of USD 4.5 trillion. FOMC members said that they intend to reduce the Federal Reserve's securities holdings to reduce the supply of reserve balances, but there are still divided about when to begin. They explained that they would decrease the “reinvestment of the principal payments it receives from securities held in the System Open Market Account. Specifically, such payments will be reinvested only to the extent that they exceed gradually rising caps”. This balance sheet normalisation plan should be implemented this year if the FED decides that the American economy is evolving as anticipated.
IMF downgraded its American Growth Forecast
As it was recently highlighted by the IMF, President Trump’s plan aren’t detailed enough to be factored into forecasts: “The administration’s budget proposes to reduce the fiscal deficit and debt, to reprioritise public spending, and to revamp the tax system but […] it became evident that many details about these plans are still undecided”.
This reason had a major influence on the IMF recent downgrade: the organization revised down its US growth forecast from 2.3% to 2.1% for 2017.
