by Mish

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.

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 ….

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

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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

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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

Fed Balance Sheet Unwinding Expected “Relatively Soon”: Let the Debate Begin

As expected, today’s FOMC meeting came with zero surprises. In addition to its standard boilerplate about inflation, the Fed stated it would begin balance sheet normalization “relatively soon”.

Spotlight on Fed’s Balance Sheet Plans

The Fed has had ample time to reduce its massive $4.5 trillion balance sheet.

Fed is Rethinking Its Balance Sheet Unwind: Expect Lower LT Rates, Higher Gold

The Fed is unlikely to keep its balance sheet reduction plan on target. There are significant consequences.

Fed Minutes Show Reliance on Consumer Confidence, Sentiment, Soft Data: Balance Sheet Normalization

Schedule Set (It Won’t Be Met). The Fed released the Minutes of June 13-14 FOMC meeting today.

Market Arithmetic and Balance Sheet Worries: Earnings vs Interest Payments

Junk bonds have been underperforming lately as widely noted. Albert Edwards at Society General also notes the underperformance of companies with poor balance sheet fundamentals.

Fed Lays Out Plan to S L O W L Y Reduce Balance Sheet: How Long Will It Take?

In addition to hiking today, the Fed announced its Plan to Shrink Asset Holdings Beginning This Year.

Financial Engineering Chart of the Day: Fed Balance Sheet vs. S&P 500

I was playing around with some ideas on the St Louis Fed “Fred” database and came up with this.

Diving Into Deutsche Bank’s “Passion to Perform” Balance Sheet

Deutsche Bank shares have collapsed to lows deep under crisis lows and collapse of Lehman in the Great Financial Crisis. What’s going on?

Rate Hike Cycles, Gold, and the “Rule of Total Morons”

In response to Janet Yellen’s everything is OK speech following today’s balance sheet reduction notice by the FOMC committee