Fed’s Aim to Unwind Balance Sheet

Fed Chair Janet Yellen

At the conclusion of the September FOMC meeting on Wednesday, experts predict the Committee will announce plans to unwind quantitative easing in effort to reduce the $4.5 trillion portfolio of treasury and mortgage bonds purchased during the Great Recession.

Many expect rates to hold steady this month with the caveat that a December rate hike is likely on the horizon. According to the CME Group Fed Watch tool, the likelihood of a December benchmark rate increase is currently at 56%.

The combination of whittling down the balance sheet, and the prospect of an additional quarter point rate hike in 2017 has left some policy makers uneasy. While the national unemployment rate has dipped to a 16-year low, the continued lackluster growth in inflation suggests the Fed maybe moving too fast in its monetary tightening. Economists will be watching for clues on how the Fed plans to reduce its portfolio without disrupting the economy and financial markets.

Regardless of market sentiment around FOMC meetings, trading during pivotal news events can potentially trigger spikes in volatility. Thus, properly managing risk/reward is paramount.

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