No letup from the Fed: Bank of Singapore

(Sept 21): The Fed confirmed that it is ready to start to shrink its US$4.5 trillion ($6.1 trillion) balance sheet. This was no surprise, but the overall tone was moderately hawkish, as policy-makers still project another rate hike in December, and three more in 2018.

Nine years after the emergency expansion began, the announcement that the balance sheet would begin to shrink in October was historic, but expected. Starting at US$10 billion per month, this will rise to US$50 billion in a year, at which pace it will take about four years for the size of the balance sheet to normalise. The Fed seems keen to put the process on autopilot, and make interest rates sensitive to fluctuations in the economic cycle, rather than the balance sheet.

Recent comments from some Fed officials had suggested they might be wavering about the plan to keep raising interest rates, due to slippage in inflation. However, only four (out of 16) of the dots were for no more rate hikes this year, unchanged from June.

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