Fed to announce balance sheet unwind in September, hike rates in fourth quarter

The U.S. Federal Reserve will announce plans to shrink its more than $4 trillion balance sheet in September, according to a Reuters poll of economists who also said the central bank will wait until the fourth quarter before raising rates again.

Results in the survey are in line with what Fed officials have hinted at in recent weeks, even as they are split on the outlook for inflation and how the lack of it might affect the future pace of interest rate hikes.

In a poll conducted just last month, predictions were for the Fed to raise rates by September. 

But expectations have now been pushed back by a quarter, with the consensus from the latest poll of over 100 economists predicting the fed funds rate to climb to a range of 1.25-1.50 percent by the end of this year. 

Financial markets are pricing in only a 43 percent chance of a 25 basis point rate hike in December. That is largely because recent U.S. economic data have been weaker than expected, especially inflation. 

The dollar too has taken a beating against a basket of currencies and was last trading near a 10-month low. The Fed has raised rates twice so far this year.

So while the Fed pauses for the next opportunity to raise rates, about two-thirds of economists say the central bank is expected to announce the course of action it will take to unwind its massive bonds portfolio in September.

Only a handful of economists expect the central bank to announce its balance sheet unwinding plan when it meets on July 25-26. The consensus was for the central bank to stand pat on rates too at that meeting.