Article Link: https://www.washingtonpost.com/news/wonk/wp/2017/09/20/in-sign-of-u-s-economys-strength-fed-to-start-reducing-4-5-trillion-balance-sheet/?utm_term=.3246d27a2676
After the financial crisis in 2008, the Fed increased its holdings of "government bonds and mortgage-related securities from $900 billion to $4.5 trillion in an effort to turn the economy around" (Long). As we can see today, U.S. economic performance has been doing well enough that the Fed believes it can start reducing its balance sheet in October. They will start with a reduction of $10 billion in October, and gradually raising that amount until they are deducting $50 billion a month.
The Fed is so confident in the amount of consumer spending, business investments, and hiring from firms that it projects a 2.4% growth this year. Additionally, the Fed believes this growth rate will be strong enough to allow for an interest rate increase by the end of the year, and three more increases in 2018 to bring rates above 2%. Moreover, the Fed expects unemployment to fall to 4.1% next year.
It is unclear what the possible outcomes could come from this move. Since the Fed will be selling off its assets, that will increase the money supply and potential increase inflation as well. However, since they will be putting money back into the economy in a gradual manner, and since our economy will still be growing, perhaps inflation will be minimal. However, we won't start to see the effects of this reduction until October. What do you think could happen from the reduction of the Fed's balance sheet?
All of the facts and numbers in the first couple paragraphs are good. It is encouraging to see that the Fed thinks we are in a good spot and want the economy to continue to grow. It could possibly bring up inflation which, again is okay if the rate of inflation stays reasonable and our growth can match or exceed it. In regards to reducing the balance sheet, I don't know enough about that to give an educated opinion, but I'd like to think the reduction of the balance sheet will simplify things for the Fed and maybe allow them to focus more on the economy than their own holdings.
ReplyDeleteThis is a step in the right direction for the Fed. As Antonio touched on, the projected growth and net deductions from the balance sheet seem nothing but promising. I am curious as to whether or not the numerous hurricanes or storms had any affect on the prominent consumer confidence, business investments, etc. that the Fed is so confident in or if the current levels of spending are so high that these natural disasters had no impact.
ReplyDeleteThere are definitely positives to take away, the first couple paragraphs show many good numbers from the FED. Like Antonio said, there is a great possibility that there could be inflation as a result of the economy growing at the rate the FED says it is based on the numbers above
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