Clients have asked about how FOMC participants view the timing of the beginning of balance sheet runoff and whether the beginning of runoff would prevent a simultaneous rate hike. See also our recent commentary on sequencing: Sequencing Two Additional Hikes and the Phasing Out of Reinvestment in 2017.
Based on our interpretation of policymakers’ comments (see the table below), we see a strong consensus for announcing the beginning of balance sheet runoff at the September meeting, although many have left the option open for an announcement later in 2017 should any worsening conditions make a delay appropriate.
Not surprisingly, an FOMC participant’s views on the sequencing of further rate hikes and a change in reinvestment policy depended somewhat on how hawkish their views are on the appropriate pace of rate hikes. Given that there is such a strong consensus for announcing the end of reinvestment, the question is whether members would also like to hike rates in September, or rather wait until December.
The more hawkish policymakers see two more hikes this year as appropriate. As a result, they tend to favor announcing both the third rate hike of the year and the change in reinvestment policy simultaneously in September. On the other hand, those whom we saw as projecting only one additional hike this year (or no additional hikes this year) appeared to prefer forgoing a rate hike at the time of the runoff announcement. For many, this is the prudent “pause” that Dudley suggested might be appropriate at the time of the announcement of the phasing out of reinvestment. Waiting to implement the third rate hike in December would also allow policymakers additional time to assess whether the recent slowdown was temporary. (For how we arrived at each participant’s likely rate projections, see our recent commentary: Naming the 2017 and 2018 Dots from the June Meeting.)
Comments by FOMC Participants on A Runoff Announcement