SAN JOSE—The Federal Reserve Bank maintained the federal funds rate at 1.125% and announced the beginning of balance sheet normalization, which will start next month, moves that were widely expected, according to third-party sources for City National Rochdale. The Fed stuck to its projection of one more rate hike this year, probably in December, say 11 of the 16 senior Fed officials.
In addition, it will gradually reduce the size of its $4.2 trillion balance sheet. The economic projections for the remainder of the year were slightly altered from its June projections, according to information provided by Randy Lagomarsino, vice president/senior relationship manager, commercial banking at City National Bank, including growth at 2.4% from 2.2%, unemployment remaining at 4.3% and inflation at 1.5% from 1.7%.
“This is a vote of confidence in the economy,” Lagomarsino tells GlobeSt.com. “That will mark the third increase in rates this year, just as the Fed had projected at the beginning of the year. The Fed views the economy as being strong enough to reduce the amount of stimulus that has been in place since the financial crisis of 2008.”
Although this rate increase takes away some of the stimulus, overall monetary policy continues to be highly stimulative, thereby supporting continued economic growth and a higher level of inflation. The Fed reduced its longer-run median federal funds rate projection from 3% to 2.75%.
“This is a big deal. They have been decreasing it since they started projecting it back in 2012,” Lagomarsino tells GlobeSt.com. “This probably is due to the lack of inflationary buildup in this expansion, despite the very low unemployment rate.”
The outlook for 2018, 2019 and 2020 is year-end 2018: 2.1%, year-end 2019: 2.7% and year-end 2020: 2.9%.
The Fed noted that hurricanes Harvey, Irma and Maria have devastated many communities, inflicting severe hardship. Storm-related disruption and rebuilding will affect economic activity in the near term.
Past experience suggests the storms are unlikely to materially alter the course of the national economy during the median term. The current pace of economic growth is below the long-term average (since 1980) of 2.6%.
Job gains are solid and the unemployment rate has fallen in recent months, GlobeSt.com learns. The Fed believes the unemployment rate will stabilize for the remainder of the year at below the long-term average (since 1980) of 6.4%.
With the recent weakness of inflation, the Federal Open Market Committee has cut its 2017 projection. The hurricanes have pushed up the prices for gasoline and some other items, which will boost inflation temporarily. The rate is below the long-term average (since 1980) of 2.9%.
Moreover, the Fed will reduce the size of its balance sheet, which had grown during quantitative easing. This will be a gradual movement as not to disturb the bond market. It will take several years to bring it down to the desired level of about $2.5 trillion.
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Lisa Brown
Lisa Brown is an editor for the south and west regions of GlobeSt.com. She has 25-plus years of real estate experience, with a regional PR role at Grubb & Ellis and a national communications position at MMI. Brown also spent 10 years as executive director at NAIOP San Francisco Bay Area chapter, where she led the organization to achieving its first national award honors and recognition on Capitol Hill. She has written extensively on commercial real estate topics and edited numerous pieces on the subject.
