The Fed's Decision on Rates and Bonds: What it Means for Wall Street
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This is Your Money Matters from The Wall Street Journal. Welcome to Your Money Matters. I'm J.R. Whalen in New York. The Federal Reserve, as expected, left interest rates unchanged on Wednesday, but hinted at a rate increase in December. The Fed also announced plans to begin shrinking its portfolio of bonds in October. So what does this all mean for Wall Street? Joining us from Washington is The Wall Street Journal's Harriet Torrey. So, Harriet, Wednesday's major announcements from the Fed weren't really a surprise, right?
That is correct. They had telegraphed this, particularly the part about the bond buying. That has been telegraphed now for months.
What did the Fed announce about interest rates and bond‑buying at the September meeting?
So really, we all knew that the Fed was going to announce plans at the September meeting to start shrinking its holdings of Treasury and mortgage-backed securities. And so the only news on that front today was that they pinpointed the exact time that they were going to start doing that. So it'll be in October. So there's a little bit more clarity on that point. But yes, it was also widely, widely expected that they would hold rates steady at the September meeting. And that's exactly what they did. What's interesting about the statement and about Yellen's press conference afterwards is that it did seem that the Fed is keeping a December rate increase very much in play.
Okay. And the rate increases and also a reduction in the Fed's bond portfolio will be put in place over time. Even if that rate increase does happen in December, it is expected to be one of several, maybe not in successive meetings, but it's going to be over time. So investors really do have to keep close tabs on the market.
Yeah. So for investors, the main takeaway from this was that the December meeting is very much still in play. And the reason that there had been some doubt about that was because inflation has been pretty... pretty weak for the past few months. And there were questions going into the meeting over whether the inflation situation was going to give Fed officials pause, whether they might be sort of dovish on the outlook for December. But one thing that we learned from what are called the summary of economic projections, which is a sort of median view across the Fed spectrum of officials of how many rate increases they think are appropriate this year and in the years ahead, They actually stuck with their June projection for one more rate increase in 2017.
Now, theoretically, that could come at the meeting that they will have on the last day of October and the first day of November. But in reality, people expect that it's much more likely to happen in December when the Fed will have a press conference after the meeting as well. So a big takeaway for investors is that rates could go up again in 2017. And the Fed is very keen to keep the balance sheet aspect as much in the background as it can. We've heard from Fed officials that the whole process should be as, quote, as boring as watching paint dry. I think people were very burned by the taper tantrum in 2013. So the Fed's objective from the outset of the balance sheet process has been to try and make the process as smooth and predictable as possible.
We're speaking with The Wall Street Journal's Harriet Torrey about the Federal Reserve's announcements on Wednesday. And you're listening to Your Money Matters here at The Wall Street Journal. Thanks for listening, everybody. Now, Harriet, the reduction in the bond portfolio, the Fed announced a particular pace at which that's going to happen. That's not going to happen all at once, right?
That is correct. Yeah. So the way that they will start off with monthly caps, what's important to note as well, people do get this wrong sometimes, is that they're not actually going to actively sell anything. The way that this will work is that maturing securities will run off. And in the past, they've been reinvesting the proceeds from these maturing securities. They'll just run off. That's how the process will work. And starting from October, they're going to cap...
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