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Janet Yellen Gives Tapering Go-Ahead, Hints Strongly at December Rate Rise

By Patrick Higgins  |  22/09/2017 06:39
Yesterday, in the aftermath of the Federal Reserve's 48-hour September meeting, Chairwoman Janet Yellen announced to the press that the Fed would begin to trim its $4.2 trillion portfolio of securities and government bonds in October, reducing it by $10 billion per month.  Additionally, Yellen indicated that the Fed would raise interest rates again in December.
 
Yellen believes that the US economy is ready for reduced levels of stimulus, which the economy has undergone three sessions of since the start of the Great Recession in 2008.
 
Markets responded accordingly.  After a shaky year of high-stakes geopolitics, perhaps most obviously with North Korea, the dollar shot to a two-month high against the yen today, at 112.725, though little change against the euro and the pound has been recorded.
 
Additionally, lower yields in short-term US bonds have already been observed, which a regular occurrence is when indications of interest rate rises are given.  The Fed's decision will most likely cause long-term borrowing costs to moderately rise over the rest of the year and into 2018.
 
Relatedly, the stronger dollar sent commodity prices downwards earlier today.  Gold dropped to a three-week low of $1,293 per ounce, and Brent and WTI futures dipped to $55.83 and $50.14 respectively.  The dipping of futures is somewhat surprising.  However, clean up from Harvey's devastation continues, the Texas oil industry will soon be at full capacity once again.  Yellen herself does not see the damage wrought by Irma and Harvey as especially long-lasting, anticipating that the oscillating effects on US economic growth from the storms would only affect growth in the short to medium-term.  Fed officials themselves are expecting a somewhat healthy level of 2.4% growth in 2017.
 
The decisiveness of the Fed on beginning its tapering program will be a massive factor in ECB President Mario Draghi's decision on when to start the ECB's own tapering program.  The current rate of monthly securities purchases stands at €60 billion and will continue at this level through December.  Through 2018, this monthly spending will depend on the rate of inflation.  With Europe having experienced a financial crisis much more recently than the US, with the credit crunch starting in 2011, expectations for the ECB to hotly follow the Fed's movements are somewhat misplaced.
 
The "Great Unwinding," as it is being referred to in the media, is one of the most significant economic moves in recent years.  Janet Yellen, the puppeteer behind the direction of the US economy, has declared the American economy ready to stand on its own two feet once again.  The economic and environmental factors are obviously suitable enough for her to make this decision, as Yellen is known for her careful observance and patience.  Furthermore, the move to increase interest rates again from 1.25% in December gives further indication that Yellen is confident this is the right move.  The strength of the US economy, the world's largest, is beneficial for the stability of the rest of the global economy.  Though we can expect oscillations in the value of the dollar, due to President Trump's pendant for aggression, the overall strength of the US economy can be assessed as satisfying and is likely to remain so through the year's end.
 

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