Report | Economic insight for September 27, 2017
The Fed ushered confusion into the markets last week. As expected, the Fed signaled that it will begin the normalization of its balance sheet next month by not reinvesting in the bond markets. This should shrink the balance sheet to $2.5 to $3.0 trillion over the next 3 to 4 years. Over that period, that should push up the long end of the yield curve by 40 to 50 basis points. Somewhat unexpectedly, the Fed signaled that it would likely hike rates one more time this year, probably in December. That caught many by surprise. While the Fed adhered to its guidance from earlier in the year, the move confused some because the data alone was not explicitly signaling that a hike would come. And the Fed has taken pains to reaffirm its data dependency. The wild card in all of this remains fiscal policy. Now that healthcare reform is dead, again, Congress can focus on tax reform. We expect only a modest tax reform package, especially now that there will be no savings from healthcare before tax reform, but tax reform could still spur slightly faster growth and inflation. Then the outlook will call for a greater number of rate hikes than the base case.
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