Thought of the day
21.09 - Fed takes another step
The Federal Reserve left interest rates unchanged and announced that it would begin the process of normalizing its balance sheet in October. This decision was extremely well telegraphed and should not come as a surprise to the market. The FOMC statement showed one other significant change, adding comment on the recent hurricanes, which suggests that the economic effects will be transitory, implying little impact to future policy.
While this result was in line with our expectations, there was a noticeable reaction in the markets, with bond yields rising and the dollar strengthening against other currencies. The most likely explanation is that the "dot plot," which indicates where each FOMC participant expects rates to be at the end of each calendar year, showed a strong consensus to hike again before the end of the year. CIO maintains its base case, which calls for a 25-basis-point hike in December and two additional hikes in 2018.
When thinking about the market implications of the announcement on the balance sheet and the possibility of a December hike, it's important to keep in mind that the Fed is no longer the only central bank moving toward normalization. The Bank of Canada has raised rates at each of its last two meetings. We expect the European Central Bank and the Bank of England to take steps soon. This reflects the improvement in global economic conditions, which we believe will support corporate earnings and equity markets, even in the face of less accommodative monetary policy.