As widely expected, the FOMC finally triggered the process to reduce the size of its $4.5tn balance sheet. Although the normalization process will start in October, which could be seen as a bit rushed, the pace of disinvestment will be very slow and has already been well telegraphed as described in the Addendum to the Policy Normalization Principles and Plans released in June.
Unsurprisingly, the US dollar reacted in a volatile fashion amid the announcement as investors struggled to assess the short and medium-term consequences of this decision. High quality commodity currencies such as the CAD, NZD and AUD experienced a more acute sell-off, mostly due to the substantial proportion of long speculative position in those currencies against the USD. The single currency dropped more than 1% but quickly stabilized slightly below 1.19, while the pound sterling slid only 0.70% to $1.35.
It must be noted that all in all, it wasn’t a hawkish meeting with both the statement and Yellen’s speech being cautious. The Fed revised downwardly its inflation forecast. Now, FOMC members don’t expect core inflation to reach the 2% percent until 2019. However, the growth forecast was moderately revised to the upside as the real GDP growth forecast has been lifted to 2.4% for 2017 compared to 2.2% previously. Finally, Fed officials cut the forecast for the official rate down to 2.8% in the long-term from 3%, suggesting a stabilisation of the economy.
By Arnaud Masset