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Why the Federal Reserve Meeting Matters

The US central bank is expected to start reducing its assets and perhaps hint at when the next interest rate rise is likely to be

James Gard 20 September, 2017 | 2:10PM

The Federal Reserve’s two-day meeting, which occurs eight times in a calendar year, is one of the highlights of the calendar for global investors. It has a direct impact on currency and stock markets, which in the US are hitting new records on a daily basis.

The Fed’s decisions have taken on greater importance in recent years

The meeting closes with an announcement on interest rates and a speech by Federal Reserve chair Janet Yellen, which will cover the reasons behind the decision and an overview of the US economy in terms of inflation and unemployment. The press conference usually gives traders an idea about when the next interest rate will happen – in this case the consensus seems to be that the Fed will next raise rates in December this year.

“We do not expect a significant change on the path of rate hikes for the next year and a half from what has already been stated by the Federal Open Market Committee. We expect one rate hike in December this year and three next year,” said Nandini Ramakrishnan, global market strategist, JP Morgan Asset Management.

“A rate hike is still on the cards for this year, unless inflation comes in even further below target,” said GAM’s investment director Jack Flaherty.

What the Fed is expected to do today is to set a timetable – likely starting in October – for the “reinvestment taper programme (QT)”, which involves the central bank reducing the trillions of dollars in assets it took on to its balance sheet in the last 10 years.

“It has long been our belief that the Fed engineered a six month window to guide the market to QT, and to give itself time to assess the reaction to it, before deciding whether or not to continue rate normalisation in December,” said Dave Chappell, fixed income portfolio manager at Columbia Threadneedle Investments.

The Federal Reserve’s decisions have taken on greater importance in recent years as it was the first central bank to start raising rates after the Global Financial Crisis saw lending rates pushed down to all-time lows. The Fed’s Target Rate is now 1.25% – interest rates were raised by 0.25% in December 2015, December 2016, March 2017 and June 2017. Interest rates were at 0.25% since the financial crisis in 2008 to the end of 2015.

The Federal Reserve is ahead of the curve in “normalising” monetary policy because the US economy has been growing faster than many other developed economies, although inflation is still below target. The Bank of England targets inflation only while the Federal Reserve has an additional mandate of “maximum employment”.

By comparison, the Bank of England cut interest rates to 0.5% in March 2009, then to 0.25% in August 2016, although there is now an expectation that November 2017 will see the first interest rate rise since 2007, when rates were raised to 5.75%.

The European Central Bank’s main base interest rate is still at 0% and it has yet to say when it will unwind or “taper” its quantitative easing programme. The Bank of Japan is yet to raise interest rates from 0.1%, with short-term rates having recently been negative for a temporary period. However, the Bank of Canada recently surprised the markets with an interest rate hike amid a booming economy.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

James Gard  is subeditor for Morningstar.co.uk