The Federal Reserve, the U.S.’s central bank, has had two primary areas of discussion at its most recent meetings. It had to survey America’s economic landscape and determine what to do with interest rates and it needed to address its balance sheet after six years of dealing with the last financial crisis.

Inflation is something that the Federal Reserve’s Federal Open Market Committee (FOMC) — which is the monetary policymaking body within the Fed — monitors closely. It is a major determinant in what decisions the Fed makes about interest rate changes. The FOMC also looks at the state of unemployment, which also factors into decisions about interest rates. They even review regional economic conditions.

At its most recent meeting, in September 2017, the Fed decided to leave rates unchanged. The Fed’s benchmark federal funds rate will remain between 1 percent and 1.25 percent.

At a press conference, after the FOMC meeting, the Fed’s chair, Janet Yellen, said “We think the economy is performing well.”  She further indicated that economic activity had been rising moderately during the year. In a statement, the Fed indicated that it felt that household spending had been increasing and business investment has picked up.

The Fed also indicated that core inflation, excluding food and energy prices, had declined during the year and was below 2 percent. Unemployment was only 4.4 percent in August, which plays heavily in the Fed’s monetary decisions.

Major storms, which impacted the U.S. mainland and territories are expected to have some short-term impact on the economy. Gas prices could be impacted, creating some additional inflation that would otherwise not have been present.

Looking Ahead

For the remainder of 2017, Fed officials have hinted at one rate increase. They also forecast three rate hikes during 2018, which would bring the federal funds rate to between 2 percent and 2.25 percent by years end. The Fed’s interest rate activity, and predictions, are particularly important to bond traders.

To help America recover from the financial crisis of 2008, the Federal reserve engaged in a systematic program of quantitative easing, which saw it buy trillions of dollars’ worth of U.S. Treasury and mortgage securities. This was done to keep borrowing costs low and support weak economic growth. Quantitative easing ended in 2014. Despite this, the Fed reinvested the proceeds on their balance sheet as they matured.

During the news conference, after the FOMC meeting, it was revealed that the Fed would reduce its balance sheet by $4.5 trillion. This would be done at the rate of $10 billion a month initially, rising to $50 billion a month over the next year.

As was the case in 2016, looking ahead at rate changes for this year, the intentions and the reality may be slightly different. Economic factors are fluid and the Fed’s decisions must respond to the most recent set of economic factors they have before them. A geopolitical event could upset the apple cart, so the best guess in the short term is to watch what the central bankers have to say after their meeting in December.

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