The Federal Reserve meets again in the coming week to talk the economy and monetary policy.
Investors are pretty confident in what's to come. Markets have given a near-zero chance of a change to U.S. interest rates, but near-certainty to the Fed beginning to unwind its balance sheet.
"The Fed has been very transparent to market participants like us about their forward guidance and our viewpoint is that if they were to do something [with rates] it would probably be in December as opposed to now," Eric Freedman, chief investment officer at U.S. Bank, told TheStreet, aligning with what the majority of economists expect. "I think the big thing next week will be more about the balance sheet than it will be about rates."
The Fed had previously said it would begin unwinding its $4.5 trillion balance sheet "relatively soon" should the economy continue to grow at the pace expected, a signal many took to mean September. Reducing the balance sheet tightens market conditions in much the same way as an interest rate hike.
But a year-end rate hike is still a little more touch-and-go. The Fed had previously telegraphed three rate hikes this year, and with two already out of the way the third was expected in December. However, continued softness in inflation data and with Hurricane Harvey and Irma likely to cloud economic data for the foreseeable future, the Fed may take a punt on that last 2017 hike.
The chances the Fed holds rates unchanged at its September meeting sit at more than 98%, according to the CME Group. Fed funds futures are currently pricing in a nearly 51% chance of a 25-basis-point increase at the December meeting, putting the federal funds rate at 1.25% to 1.5%.
The Federal Open Market Committee, the decision-making branch of the central bank, will meet for two days beginning on Tuesday, Sept. 19. An announcement and updated forecasts will be released on Wednesday, Sept. 20, followed by press comments from Fed Chair Janet Yellen.
Outside of the Fed, the housing market will be under the microscope in the coming week. The housing market index for September is set for Monday, Sept. 18; housing starts for August are to be released on Tuesday; and existing home sales for August on Wednesday. Tight supply has choked off demand in recent months.
The Philadelphia Fed Business Outlook Survey for September will be released on Thursday, Sept. 21, and a flash reading on the Composite PMI on Friday, Sept. 22.
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