On the September FOMC
Normalization of the Fed’s balance sheet will begin in October, with the FOMC brushing off any economic perturbations from the hurricanes. We strongly reiterate that the very gradual run-off of the balance sheet – the glacial pace of which Yellen promised was a permanent feature – does not represent policy tightening. All it does is require that a very risk-tolerant global market absorb, very gradually, small amounts of duration, pre-payment and credit risk. Chances of a December rate hike have risen somewhat with the FOMC’s dismissal of hurricane effects. But the “dotplots” show falling anticipated policy rates at all tenors – including the “longer run,” where one participant broke new ground with a 2-1/8% funds rate prescription.