September 19-20, at their 6th meeting of 2017, KResearch expects the US Federal Reserve may signal the start of their balance sheet reductions by USD10 billion, shaving off USD6 billion in government bonds and USD4 billion in MBS. In any case, the details of any such intended move will likely be unveiled during the meeting. Meanwhile, the Fed will likely also resolve to hold their key policy interest rate unchanged at 1.00-1.25 percent, pending further assessments on inflation. In reducing their balance sheet, the Fed is not likely to cause any serious repercussions to global financial markets, given the rather small volume of the expected reduction relative to the total values of government bonds and MBS issued in 2016 at USD2.2 trillion and USD2 trillion, respectively.
The main focus will likely be placed on the Fed's confidence toward future US economic expansion and whether they may possibly signal one more interest rate hike this year, which could result in gradual USD appreciation over the rest of the year and might indicate that the USD has now hit bottom.
However, if such signals are not seen, or if the Fed significantly changes their viewpoint on inflation, the USD may be pressured into falling further. If the Fed does not raise their key rate further by the yearend, financial markets may then expect that another rate hike might not occur until after 1Q18, because the term of Fed Chair Janet Yellen will end in February 2018. In addition, there will be four other vacancies on the Board of Governors, given that Mr. Stanley Fischer recently submitted his resignation. This situation may lead to an important shift in FOMC monetary policy and thus is worthy of close observation.