While some commentators remain convinced the Fed will further increase rates by the end of 2017, others have pointed to worryingly low inflation and a slowdown in wage growth as potential headwinds facing the economy.
The Fed voted to increase rates on Wednesday to 1.25% and maintained its own forecast that rates would rise at least one more time in 2017.
Leila Butt, a senior economist at Prudential Portfolio Management Group, said: “As anticipated, the Fed has hiked rates for the second time in 2017 and we’d expect it to do so again before the year is out, as it also begins to shrink its balance sheet.”
However, Anna Stupnytska, global economist at Fidelity International, said “emerging headwinds” in the US economy meant a second hike would be unlikely this year.
“I still expect this to be the last hike for 2017, given emerging headwinds for the US economy, in particular for consumption, as well as the worryingly weak inflation and wage growth paths,” she said.
Stupnytska added that while the Fed would be “under little pressure to tighten policy in the next few months” ultimately the tightening effect could come from the balance sheet reinvestment programme.
The Fed revealed its plans to begin reducing its $4.2tn portfolio of Treasury bonds and mortgage-backed securities left over from the 2008 financial crisis.
In a statement it said: “The committee currently expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated.”
This rebalancing could give the Fed the excuse not to hike rates as it would provide additional tightening, Hermes chief economist Neil Williams.
He said: “Helpfully, the FOMC is now debating whether to start reducing the QE stock later this year. This is the logical next tightening step, but is the gentlest possible form of quantiative tightening.
“Asset sales would be deferred, but their replacement-rate on the balance sheet tapered increasingly every three months. However, what it will do is allow them, in tandem with interest rate rises, to provide additional tightening ‘by doing nothing’”
