Fed Begins Balance Sheet Unwind, Expects One More Rate Hike In 2017

Tyler Durden's picture

Today's the day.

On Nov 25, 2008 The Fed announced it would begin buying assets for its own account to save the world. In Oct 2014, The Fed ended its QE3 buying program but continued to reinvest the proceeds to maintain its $4.4 trillion balance sheet. Today, Janet Yellen announced the balance sheet will be allowed to normalize, with reinvestments slowed/stopped starting in October.


  • *FOUR FED OFFICIALS SEE NO MORE 2017 HIKES, UNCHANGED FROM JUNE ( Eleven Fed officials now see one more hike in 2017 versus just eight in June.
    - market odds only 50%)

As expected, the Fed announced it will begin reducing bond reinvestments, starting by $10 billion per month and growing to $50 billion. This is what the Fed's tapering looks like in context:

The Fed cut long-term rates:


... or specifically, 2.75%, which assuming 2.0% inflation as the Fed does, implies a 0.75% real funds rate. So much for growth potential.

The rest of the forecasts were kept largely in line, with the Fed seeing slightly lower inflation in 2018 vs June and a modest drop in the unemployment rate in 2018 and 2019.

More forecast details:

Longer-run median unemployment rate 4.6% compares to previous forecast of 4.6% at June 14, 2017 meeting

  • 2017 median jobless rate at 4.3% vs 4.3%
  • 2018 median jobless rate at 4.1% vs 4.2%
  • 2019 median jobless rate at 4.1% vs 4.2%
  • 2020 median jobless rate at 4.2% vs n/a

Longer-run real GDP median projection of 1.8% compares to previous forecast of 1.8%

  • 2017 median GDP growth 2.4% vs 2.2%
  • 2018 median GDP growth 2.1% vs 2.1%
  • 2019 median GDP growth 2.0% vs 1.9%
  • 2020 median GDP growth 1.8% vs n/a

Longer run PCE inflation median at 2.0% compares to previous forecast of 2.0%

  • 2017 median core PCE inflation 1.5% vs 1.7%
  • 2018 median core PCE inflation 1.9% vs 2.0%
  • 2019 median core PCE inflation 2.0% vs 2.0%
  • 2020 median core PCE inflation 2.0% vs n/a

Longer run Fed funds median at 2.8% compares to previous forecast of 3.0%

  • 2017 median Fed funds 1.4% vs 1.4%
  • 2018 median Fed funds 2.1% vs 2.1%
  • 2019 median Fed funds 2.7% vs 2.9%
  • 2020 median Fed funds 2.9% vs n/a

* * *

The big story, however, was the dots, where 12 Fed members now expect a rate hike in December vs 4 who believe rates wil stay unchanged. Also, one Fed member see two more rate hikes before the end of the year, or a 50 bps rate hike in December.

According to the "dots", the median target for 2019 is 2.688% vs 2.938% in June; longer-run median is 2.75% vs 3% in June; 2020 median debuts at 2.875%. The median end-2017 dot is 1.375%, while in 2018 it rises to 2.125%, unchanged from previous. In June, only the 2019 median changed, declining to 2.938% from 3%

Forecast ranges narrow for 2018, 2019; longer-run widens:

  • 2017 range 1.125%-1.625%, unchanged
  • 2018 range 1.125%-2.725% vs 1.125%-3.125% in June
  • 2019 range 1.125%-3.375% vs 1.125%-4.125% in June
  • 2020 range 1.125%-3.875%
  • Long-run range 2.25%-2.5% vs 2.5%-3.5% in June

A curious observation here is that the median 2020 dot (2.875%) is higher than the median Longer Run dot (2.75%)

A comparison of the dots vs the market:

Here are the maturing assets that will not be reinvested over the coming months...

Many market participants appears to believe that The Fed has given investors plenty of notice that they would begin to unwind their balance sheet and so the actual event will be like "watching paint dry." This seems more than a little disingenuous given the great levels of confidence embued into the actual QE process to save the world.

As one wit on Twitter noted, "If I tell you everyday for 6 months that I am going to cut off your head on 9/20... you are prepared, but how will you react on 9/21?"

We shall see.

*  *  *

Since the July FOMC Meeting, gold is the biggest gainer as the dollar loses ground...

*  *  *

Notably the Taylor Rule (and the balance sheet-adjusted version) is implying The Fed should be about as tight as its been in decades...


And of course, here is what The Fed is really worrying about - they've lost control...


December Rate Hike Odds were at 53% heading into the statement...


Market liquidity flatlined heading into the FOMC statement...

This might help explains the three-card-monty game The Fed is playing, courtesy of ING, is the definitive "cheat sheat" matrix laying out all possible permutations of what can happen tomorrow, as well as the most likely market reaction.


Full Statement redline below:

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NickyGall's picture

As shown in this article, a key economic measure is showing that the economy is likely already slowing down:




At this point in the economic cycle and with the economy's addiction to cheap credit, the Fed finds itself and its post-Great Recession monetary experiment caught between a rock and a hard place. 

Hammer823's picture

Yes, 10 years after the financial crisis, our robust economy and all time high stock market can't withstand a minor quarter point increase in rates.  The TRUTH is that our Federal Government can't function in a normalized rate environment due to all of the DEBT it has accumulated.   And the stock “market” must be rigged to go up forever for every 401k, ira, and government budget to succeed.

NugginFuts's picture

Hurricane Janet spotted off the coast of Wall Street - expected to be a Cat 5 by landfall. Stay tuned!

NotApplicable's picture

Somebody care to define "normal" for me? Or is stopping reinvestment all there is?

knukles's picture

So what's this all gonna change?

This action is not going to Help economic activity.  Period.  EOC 
Unless somebody wants to talk about returns on money market funds going from 0.1% to 0.2%, a 100% increase.

Like sucking an egg.

Getchur long bonds while they're still on sale!
Good time to buy risk off assets; gold, bonds, etc.

kliguy38's picture

LOL total bullshit aint it.........all jawboning cuz they iz gonna FLATTEN the long end of the curve and then the SHTF.......ie they're trapped

Gaius Frakkin' Baltar's picture

And they start it Oct? Brilliant.

It's almost like they're expecting a panic so they can immediately backstep...


Antifaschistische's picture

Article title very misleading.  It should be...

"Fed continues talking about beginning the unwind at some point in the future"

NoDebt's picture


Bwaaaaahahahahahah!  WHEN?  WHEN MONTHERFUCKER?  2087?  At the current rate of increases it would take about 5 years.

strannick's picture

stopping and slowing bond buying isnt selling bonds...and who said they were contnuing to buy bonds, I thought QE was over

hxc's picture

They're just replacing the bonds as they mature. Very simple stuff. That's the only buying they've been doing; under Yellen the Fed balance sheet has remained flat.

ejmoosa's picture

And as shown historically, the Fed is the last to see a real slowdown/recession.

GETrDun's picture

Why do i get the feeling that everything i buy is going to get way more expensive.

We all know who is going to ultimately pay the price for the banks gambling on housing. (Again)

Cursive's picture

Neutral to mildly bullish?

Hammer823's picture

Well, there certainly hasn't been any "bad" news since 2013.  So yes, neutral or bullish, which means bullish.

Cursive's picture

LOL.  5 imnutes to the close and up a point and a half.  Someday....

spastic_colon's picture

 "Higher prices for gasoline and some other items in the aftermath of the hurricanes will likely boost inflation temporarily; apart from that effect, inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee's 2 percent objective over the medium term"

Just goes to show you what a crock of bullshit the inflation measures really are!

and from the sounds of it the reduction will take 40 years...............

mkkby's picture

Went galt a few years ago and live comfortably on less than I made in 1985.

So I don't see inflation either. Sure healthcare is way up. But that's a protected monopoly. Force service providers to post their prices. If we could shop around like we do for every other product/service, prices would drop by 80%.

In the meantime, live frugally and cut out cable, iCrap and eating out every day and you can stop whining like little snowflakes.

Ban KKiller's picture

So...Goldman Sachs said so, eh? 

lester1's picture

Who's going to buy their toxic assets ???

oddjob's picture

Nobody, but themselves. Burn the bond and print the amount, get paid twice.

any_mouse's picture

You, me, everybody who is not in the Club. Unborn generations.

The enemy in Starship Troopers was recognizable and alien.

Our enemy is hidden, deceitful, and lives among us.

Chief Wonder Bread's picture

"and lives among us"

Any way to tell? Special glasses?

Joos kidding.

Chupacabra-322's picture

@ any,

For as long as the Populace continues to CONSENT to the Board of Directors aka "CONgress" & its CEO aka "President" within their 10 square mile Criminal Fraud DC District of Criminals.

The raping, murder & pillaging will continue. And, the Custom wearing jack booted thugs will continue to enforce the Fraud.


Black Laws Dictionary, CONSENT to it by birth, silence, signature etc...

They're all involved in an elaborate scheme based on contrat law & Criminal deceit to Fraud The American People by CONSENT (Black Law's Dictionary) & being an accessory to the deceit & Criminal Fraud by contracting with the Criminal State.

We are "Governed" Indoctrinated into a Political, Educational, Religious & Economic UNITED STATES, CORP based on contract law which is based on Criminal Fraud, deceit & illusion.

The Private Corp UNITED STATES, CORP uses the cover of being a functional Government when in reality they are not. Much like the Criminal Federal Reserve uses The "Federal" in their name & use it as cover to give the illusion that they are a branch of the US Government when they are not.

Through bankruptcies, Criminal Contract Fraud & deceit the Charlatans have incrementally incorporated the US as well as your souls (birth cert) which are securitized via the Criminal Federal Reserve through to the IMF.

They're functioning off corporate version of the THE CONSTITUTION. It's the reason why The Global Criminal Oligarch Cabal Bankster Intelligence Crime Syndicate continues to lie, cheat, deceit, rape & pillage with impunity.

The only power the have over you is with CONSENT (Black Law's Dictionary). Pay no Taxes. Peaceful Non-Participation, Non-Compliance & being an accessory into their Criminal system/s based on Criminal Fraud, Debt Bondage & Enslavement.

Vote with Your Dollars. Seek Alternative Systems Decentralized outside the Control of the Borg. They're out there. Peer to Peer. Seek them,

Long Agorism.

The ideology which asserts that the Libertarian philosophical position occurs in the real world in practice as Counter-Economics (see below).

Conscious practitioner of Counter-Economics; older terms include Left Libertarian and New Libertarian.

The study and/or practice of all human action which is forbidden by the State, including violation or non-compliance with regulations; sale and delivery of controlled or forbidden substances; ignoring of all borders and internal state boundaries, customs, tariffs, duties and taxes; evasion of taxes, tributes, levies and assizes; non-compliance with personal regulation such.

James Corbett:?The Most Dangerous Philosophy the Oligarchs Do Not Want You To Know.


1stepcloser's picture

who is gonna buy what they are selling....I gots to know..  

Consuelo's picture



Now I know what you're thinking...

FreeShitter's picture

Gold not liking this...

spastic_colon's picture

strong dollar fed statement..........although they'll never admit it.

Ignatius's picture

Wait till gold gets a good wiff of debt failure.

That is, unless the Fed is lying... naw, could't be that.  Anything but that.

Son of Captain Nemo's picture

"Gold not liking this..."

Until of course the U.S. defaults some moar with no means for payment other than an idle threat to start World War III on North Korea or Iran if for some unknown reason they don't receive a $trillion + (loan package) in that "yellow metal" you just mentioned from both the PRC and Russian Federation... Pronto!

Should be a great Xmas this year!!!

Big Brother's picture

Closed my dollar shorts 1 hour before the anouncement.


Now, to see whether this news will change the direction of the dollar index...

Iskiab's picture

Tough call, if they do manage to raise rates in December the dollar will rally, good time to close the shorts.

The way I see it unwinding the balance sheet will create a glut in securities. They'll need to raise rates to attract buyers, so bond prices will drop. Raising my rates will also slow the economy and expect equities to go nowhere for a while. There won't be a correction unless there's a major catalyst.

For the first time ever I agree with these guys on here who say to buy gold like they get a commission from every sale. I can't see getting a good return from any investment at the moment until I see how things pan out.

Big Brother's picture

Good analysis.


If it's dollar bullish through December, every major Dollar pair has huge resistance (KUMO) to work through.


I will attempt to time entries long of GBP and EUR against JPY.

mkkby's picture

12 weeks, LOL.

Even junk bonds have been bid to ridiculously low yields. I guarantee you, what ever the fed or the banks put up for sale, there will be a long line of pension funds waiting to buy them up. That's why they're called MUPPETS.

Didn't Austria just sell 100 year bonds? What a fuckin' hoot.

saldulilem's picture

What the Fed giveth, the SNB taketh

Consuelo's picture



And the Caymans...



Overleveraged_and_Impatient's picture

Folks this means nothing at all. The fact of the matter is that if the S&P is not at or near all time highs come December she will simply announce more QE or a rate hike if necessary. Moreover, the SNB will continue buying US Equities.

Blankfuck's picture


gatorengineer's picture

Bullish for Belgium..... lets see who gets the reference....

apu123's picture

Is that because "Belgium" was at one time a big buyer of U.S. debt?

Pleb_From_Windsorstan's picture

ECB Brussels Belgium.

Draghi isn't it?