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From the Editor

BEGINNING OF AN END – As widely expected, the Federal Reserve announced to not change the key interest rates opting to keep the short-term benchmark rate between 1 and 1.25 per cent. Despite a strengthening job market, with the unemployment rate at just 4.4 per cent, inflation has stayed undesirably well below its two percent annual. The central bank lowering the long run-forecast for the benchmark interest rate to 2.8 per cent, down from three per cent in a previous forecast in June, suggests growth is expected to remain sluggish and inflation low. “The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.” the Fed said in a statement. Having raised the federal funds rate four times since December 2015, the central bank signalizes to again raise the rate once in 2017 and three times in 2018.
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In addition the Fed announced to start gradually unwinding its US$ 4.5 trillion balance sheet. This is a historical decision as it is the beginning of the end of an experiment that has never been seen before in economic records. With the Quantitative Easing (QE) policy that has been introduced after the 2008 financial crisis major central banks entered unknown territory. Because conventional monetary policy instruments seemed to have reached their limits (key interest rate sunk from 4,5 per cent to almost zero without significant observable economic stimulation) central bankers around the world decided to expand its balance by large-scale acquisitions of mainly government and mortgage-backed bonds. Despite initial disenchantment about the effects of the taken measures, the policy showed results with the U.S. economy slowly recovering and the QE program, initially introduced by former Fed chairman Ben Bernanke, continued to be conducted under Janet Yellen. As of this day, the Fed will begin to cut back its Quantitative Easing measures. As the bonds mature, the Fed plans to reduce its spending by US$ 10 billion each month, raising the savings by another US$ 10 billion each quarter, ultimately reaching a US$50 billion reduction monthly by October 2018. Yellen pursues a strategy of prudence. These Fed’s careful steps were meticulously planned and communicated, predictability is key. The question of how much the balance will be reduced remains unanswered, it might be assumed that the Fed will keep significantly more bonds than in it did in the pre-crisis state when it held US$900 billion. The U.S. central bank’s decision raises the question when the ECB will start its QExit. The European central bank lead by Mario Draghi still buys bonds worth €60 billion. The voices in the ECB demanding an end of buying bonds keep getting louder. Jens Weidmann, head of the German central bank and one of the biggest critics of Draghi’s expansive policy recently warned to not miss the right time for a normalization of the monetary policy. fh

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