On the September FOMC

Donald L. Luskin
Wednesday, September 20, 2017
Hurricanes be damned. Balance sheet normalization begins in October. Don’t fear it.
Strategic view: 

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.