Today we are going to talk about this week’s FOMC meeting.

As expected the Federal Open Market Committee left the benchmark rate unchanged.

The Fed did however announce formal plans to reduce its $4.5 trillion balance sheet.

Starting in October the Fed will allow $6 billion in Treasuries and $4 billion in mortgages

to run off each month.

Every quarter they are going to increase the runoff until $30 billion of Treasuries and

$20 billion of mortgages run off each month.

The Fed did not give a timeframe for when the runoff would stop and at what level of

a balance sheet they will maintain.

Conservatively speaking it could take 8 years

at that pace to reduce the balance sheet to zero.

Now this balance sheet move was widely expected by the market.

What surprised the market a tad was that a majority of the FOMC members, in addition

to the balance sheet wind down, also want to increase the Fed Funds rate one more time

this year (likely in December).

So in summary the Fed will start unwinding the balance sheet, which in effect is like

slowly raising interest rates, as well as potentially raising rates in December along

with the general consensus that they plan to raise rates 3 more times next year.

And what was the market’s reaction to all of this news?

Rates went up only 2bps.

You might be asking yourself why there was such a small reaction by the market.

The first thing you have to remember is that we still do not have tax reform, health care

reform, an infrastructure spending bill or inflation for that matter.

Also keep in mind that while rates are low in the United States, they are generally much

lower in other countries around the world, so Treasury and mortgages yields are very

attractive to investors.

Not to mention the impacts of Hurricanes Harvey and Irma

have not filtered through the economic data.

In the coming weeks you should keep an eye on the following items:

1. The spread between mortgage and Treasury rates and the impact of the

unwinding of the Fed’s balance sheet.

You might see mortgages move with more volatility

than treasuries but I’ll get more into that next time.

2. Next week brings GDP data from the 2nd quarter as well as Core PCE

3. And lastly any further comments from the Fed

in terms of policy for the remainder of the year.

If you would like a more in-depth analysis, please visit our blog.

Thanks for watching and have a great day.