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Macro Comment US

Macro Comment US — Balance sheet reduction in September

We revise our Fed forecast: we now believe that the central bank will hold rates steady in September and instead announce a plan to reduce its balance sheet at the meeting. In June this year, the Fed published a plan for quantitative tightening. Balance sheet reductions are not intended to play an active role in mone-tary policy during normal times. The Fed's intention is that they should run quietly in the background for years, while monetary policy is operated through adjustments of the federal funds rate.

Petter Lundvik, Senior Economist |

Macro Comment US — Financial conditions key to the Fed

We are convinced that financial conditions-both actual and expected-are key to understanding why the Fed has not delivered in line with its forward guidance since the start of policy normalisation in late 2013. However, at present, consistency between forward guidance and policy delivering seems to be improving. So far in 2017, actual rate increases have been in line with the Fed's forward guidance. Nevertheless, we expect financial conditions to deteriorate sharply in the future, which will contribute to an end of policy tightening in 2018 and to prompt a recession in 2019.

Petter Lundvik, Senior Economist |

Macro Comment US — Balance sheet reduction and financial markets

In June, the Fed announced a detailed plan for balance sheet reduction, before it had assessed the amount of securities needed to carry out policy in the future. The amount depends on monetary regime. The choice has not yet been made. The Fed Chair, Yellen, does not believe that the reduction would affect financial conditions much. Yellen's intention is for the reduction to run quietly in the background for years, while monetary policy is operated through adjustments of the Fed funds rate. In our view, Yellen is a little too optimistic.

Petter Lundvik, Senior Economist |

Macro Comment US — Limited need for Fed balance sheet reduction

We argue that the Fed will likely stick to its current "floor" policy regime. That implies that the Fed needs a balance sheet of at least USD 2,900bn today and USD 4,000bn in ten years, which indicates that a sharp reduction of the USD 4,500bn balance sheet is not urgent. The Fed plans to start unwinding its balance sheet later this year before Chair Janet Yellen's term ends in February next year. However, we expect the reduction to take place very gradually, with the Fed probably aiming for a reduction of USD 500bn over the first five years.

Petter Lundvik, Senior Economist |

Macro Comment US — Trump unlikely to lift growth permanently

GDP growth seems to be slightly above its potential rate, which would decrease unemployment further. Low productivity growth and an already overheated labour market would likely curb growth ahead. In our view, Trump's fiscal policy stimulus would only trigger a short-lived economic expansion followed by an economic slowdown. To avoid jeopardising growth, the Fed will likely keep its prevailing cautious interest rate strategy.

Petter Lundvik, Senior Economist |

Macro Comment US — Fed increases rates and raises its rate forecasts

The Federal Reserve decided to increase rates by 0.25 percentage points at the December meeting. It also raised its forecasts for the federal funds rate. The Fed forecasts three rate increases of 0.25 percentage points each in 2017, 2018 and 2019, compared to its previous forecast in September of two increases in 2017 and three in 2018 and 2019. However, we do not believe that the Fed will deliver in line with its interest rate forecast. The Fed has postponed rate increases before and will likely continue to deliver less than promised.

Petter Lundvik, Senior Economist |