Economists Expect Fed to Start Shrinking Balance Sheet in September

By Harriet Torry Features Dow Jones Newswires

Most economists polled by The Wall Street Journal expect the Federal Reserve will start shrinking its $4.5 trillion holdings of bonds and other assets in September, and next raise short-term interest rates in December.

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The share of business and academic economists expecting officials to lift rates at the Fed's final policy meeting of the year rose to 65.1% in The Wall Street Journal's latest survey, compared with 33.9% of those polled a month ago.

Far fewer, 22.2%, expect the Fed to next raise rates at its Sept. 19-20 policy gathering, the next central bank meeting that will be followed by a press conference and the release of officials' new economic projections. That is a sharp drop from last month's survey, when more than half of economists quizzed, 54.2%, expected the Fed to raise rates for the third time this year at its September gathering.

Fed policy makers meet next July 25-26, but a mere 3.2% of economists expect the central bank to raise rates then.

Officials raised their benchmark federal-funds rate at their June 13-14 meeting, to a range between 1% and 1.25%, and penciled in one further rate increase this year.

Speaking to the House Financial Services Committee Wednesday, Fed Chairwoman Janet Yellen said the central bank continues to plan for gradual interest-rate increases, but is attentive to a recent softening in inflation measures.

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In the WSJ survey, which was conducted before Ms. Yellen testified, some economists said their expectations for further rate increases this year will depend on the Fed's timeline for shrinking its large portfolio of bonds and other assets, known as its balance sheet.

"I am torn between September and December" for the next rate increase, said Chad Moutray, chief economist for the National Association of Manufacturers, noting that the Fed could start shrinking its balance sheet in September.

Ms. Yellen told lawmakers Wednesday she expected to launch the plan to shrink the balance sheet "relatively soon" this year, but wasn't more specific about the timing.

The central bank currently maintains the size of the portfolio of bonds and other assets by reinvesting the proceeds from its maturing assets. Officials have agreed to reduce the holdings over time by gradually tapering that process.

Most economists, 61.3%, predicted the Fed would begin the process in September, up from the 24.6% who made that forecast in the previous survey. Just 14.5% of economists now expect a December start, down from 42.1% of respondents last month.

The Journal surveyed 63 economists July 7-11, but not everyone answered every question.

Write to Harriet Torry at harriet.torry@wsj.com

(END) Dow Jones Newswires

July 13, 2017 10:14 ET (14:14 GMT)