The November FOMC meeting is not expected to deliver any policy course alteration. Financial markets will remain watchful of the statement’s tweaks on inflation wording.
The FOMC September meeting minutes indicated that most officials believe that another Fed funds rate increase is warranted by the end of 2017. However, lingering soft inflation remained a concern for several members whose decision “would depend importantly on whether the economic data in coming months increased their confidence that inflation was moving up toward the committee’s symmetric 2% objective.”
Fed funds futures are pricing in a December rate hike with an implied probability of 98% and are expecting the next rate increase to be in the second quarter of 2018.
The Fed intends for its gradual and predictable balance sheet reduction to run on autopilot. At the start of trimming, financial market volatility has been low with no impact on term premium.
The 10-Year Treasury yield has adjusted to higher rates in line with both the attrition of the Fed’s reinvestment policy and the dissipation of downward pressures from safe haven flows.
The baseline is for a gradual increase in long-term yields