As expected, the FOMC said little that was new in the release of yesterday's post-meeting policy statement. Yes, there were the obligatory tweaks to the first paragraph regarding current economic conditions and some very modest adjustments to the committee's view on inflation. And yes, there was a discussion about starting to wind down the Fed's $4.5 billion balance sheet. But all in all, the statement was a non-event from a market perspective.
On the inflation front, the statement said inflation measures "have declined" and are "running below 2%." Analysts quickly compared/contrasted this to last month's assessment, when it said inflation had "recently declined" and was "somewhat below" 2%. Such is life as a Fed-watcher!
Although the changes were subtle, some analysts opined that this month's characterization of inflation suggests the Fed views inflation as more entrenched and less transitory than it did in June.
The main event in the release, which wasn't really new, was the statement that the FOMC expects to implement its balance sheet normalization program (i.e. the selling of bonds the Fed holds) "relatively soon." The general consensus among the Fed-watchers I follow is that the "normalization" will begin at the conclusion of the next FOMC meeting on September 20. The expectation is the Fed will announce that starting in October, it will gradually decrease its reinvestment of principal payments from its securities holdings, in accordance with its previously released Policy Normalization Principles and Plans. And if all goes according to plan (insert hearty chuckle here), the Fed's "balance sheet" would be back to "normal" in four or five years.
Based on the aforementioned "principles and plans" offered up so far by Yellen's crew, Ned Davis Research took a look at what the wind down of the Fed’s balance sheet might look like. Although the Fed has not given anyone an exact end target for their plan, NDR expects the Fed "will shrink its balance sheet until the total securities held is the equivalent of 10% to 12% of GDP, or by roughly $2 trillion." This means the Fed's balance sheet wouldn't "normalize before 2021 or after 2022, assuming no recession, of course.
The market's reaction to the news - or lack thereof - was a yawn. The dollar fell a bit, bond prices rose on the idea that the Fed isn't in a position to hike rates faster than expected, and the stock market had little to no reaction.
At this stage of the game, the markets seem to believe that the Fed may not even raise rates again in 2017. According to the action in the futures markets, the implied "odds" of another rate hike in 2017 are no better than 50-50. Note that this runs counter to the Fed's "dot plot," which suggests there will be an additional increase in the Fed Funds rate before year-end.
For me, the key takeaway is that Ms. Yellen and her compadres have done a pretty good job in terms of communicating their intentions to the markets. And as anyone who has been in this business awhile knows, Ms. Market is not fond of surprises. As such, Yellen & Co. are to be commended for their efforts.
Thought For The Day:
"I'm not telling you it's going to be easy, I'm telling you it's going to be worth it." Art Williams
Current Market Drivers
We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).
1. The State of the U.S. Economic Growth (Fast enough to justify valuations?)
2. The State of Earnings Growth
3. The State of Trump Administration Policies
4. The State of Fed Policy
Wishing you green screens and all the best for a great day,
David D. Moenning
Chief Investment Officer
Sowell Management Services
Disclosure: At the time of publication, Mr. Moenning and/or Sowell Management Services held long positions in the following securities mentioned: none. Note that positions may change at any time.
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