Photo by Bloomberg News Agency

JAKARTA (TheInsider Stories) – United States central bank (the Fed) has left interest rates unchanged at up to 1.25 percent. The policymakers are also sticking with their prediction of one more rate hike this year.

A whopping 11 members of the 16-member rate-setting committee said they expected another 25-basis-point increase in Fed rates by the end of the year, heightening expectations that that increase will occur at the committee’s December meeting.

The Federal Open Market Committee (FOMC) on Wednesday announced that it would begin to initiate a reduction of its balance sheet next month by setting caps on the reinvestment of principal payments from the Fed’s balance sheet.

The plan calls for the roll-off of US$6 billion in Treasury securities and $4 billion in mortgage-backed securities per month through December, followed by gradually increasing caps every three months until October 2018, at which time the caps will reach $30 billion per month in Treasuries and $20 billion per month in mortgage-backed securities.

The caps are meant to gradually reduce the Fed’s $4.5 trillion balance sheet, though where the reductions will stop remains uncertain. The Chair Janet Yellen said expects the final balance sheet value to be “appreciably below recent levels, but larger than before the financial crisis.”

Economic projections were slightly revised from the June meeting, with the committee estimating GDP growth at 2.4 percent, up from 2.2 percent in June. Inflation projections were revised downward, however, to 1.5 percent from a 1.7 percent estimate in June.

“On a 12-month basis, overall inflation and the measure excluding food and energy prices have declined this year and are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance,” the Fed said.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. 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.

Consequently, the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. 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.

Yellen explained in determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation.

This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal.

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.

Writing by Linda Silaen, Email: linda.silaen@theinsiderstories.com

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