Fed will reduce its Balance Sheet in spite of low inflation

The recent crisis in the U.S economy has created an extreme level of uncertainty regarding the third rate hike in the year 2017.Though the current inflation rate in the U.S economy was a major threat, the recent delay in reducing the balance sheet has softened the inflation rate problem to a great extent. According to the statement of St.Louis James Bullard, president of FED, there is no possibility of another rate hike unless the central banks gain full control of the current reduction balance sheet problem. Things went further more negative for the green bucks after Minneapolis’s Neel Kashkari came up with a dovish statement regarding the next rate hike program. More over the current economic conditions of the U.S economy is struggling hard to recover its recession period and another rate hike will definitely push the investor’s community down as borrowing cost for expanding the business will be much higher.

However, some of the leading economists are expecting that the inflation rate will again hit the 2 percent target which will clearly become one of the main cause to hold the current interest rate. Though the U.S labor force has been doing relatively well compared to other sectors but the optimistic dollars bulls are still in doubt regarding the recent bullish steam in the U.S dollar index. More over FED is most likely to reduce their current $4.5 trillion balance sheet so that the central bank can adjust the current inflation rate to bring stability in most of the economic field and anything near the 2% mark is a clear sign of recovery in the U.S economy. Currently, the U.S unemployment rate is near the 16 years low which also signifies a rise in wage or inflation. The Consumers are also suffering hard due to 1.4% gain in the price pressure.

The strong dovish stance from the leading voting member of FOMC (Kashkari) will definitely create a strong pressure in the U.S central bank to trim their current balance sheet. Though there has been 4 rate hike in the U.S economy since 2015, another rate hike in the year 2017 might create a long term negative impact on the U.S dollar. According to some currency strategist, another rate hike is nothing but a dream for the FED officials. However, if the U.S economy recovers in blazing speed for the next few months then there is a slight chance of another rate by the end of the year 2017.The maturity period of Treasuries and mortgage might go through another revision. Overall the ultimate solution to all these financial crises depends on the reformation of current balance sheet structure. Until the current crisis is settled down the investors will have a tough time in the trading world to make a decent profit.
See also: