The Fed raised short term rates for the second time in 3 months and set forth the procedures for reducing its $4.2 billion balance sheet. The 10 year Treasury rallied today with the yield dropping to 2.13%. This was due to lowered expectations for growth and inflation: (1) The Fed lowered their inflation forecast for 2017 to 1.7% and now expects to reach the elusive 2.0% target in the “medium term”; (2) This week’s CPI and Retail Sales reports both disappointed; (3) Oil prices are back well below $50 per barrel on reports that OPEC may be relatively powerless to raise prices due to massive shale production here; (4) the long awaited “Infrastructure week” of announcements was short on specifics or a major cohesive plan; (4) The very act of raising short term rates will dampen growth and inflation. Balance Sheet: The Fed will finally trim its balance sheet, Fed Chair Yellen indicated that “normalization” could be “relatively soon” with a cap on reduction of about $6 billion per month, increasing by $6 billion increments every 3 months over a 12 months period until it reaches $30 billion per month. This would suggest a pace of about $1 trillion of reduction every 3 years. The Fed will most likely pull back on that target during volatile economic periods, so who knows how long or how deep the reduction will go. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners.
