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CCTV Script 27/07/17


— This is the script of CNBC's news report for China's CCTV on July 27, Thursday.

In the FOMC statement released last night, Fed stated that it is keeping its interest rates policy unchanged, which was expected. However, there are two changes which were interpreted as an adoption of dovish monetary stance. The first change is having greater clarity on when Fed will unwind their balance sheets. Previously, in its policy statement and meeting minutes, itvaguely mentioned that the reduction would start by this year. This had caused many to focus on Fed's rewording of its unwinding schedule in this statement. And indeed, Fed changed "this year" to "relatively soon" and the markets took this rewording as a possible hint that the reduction will formally begin in September.

[Kenny Polcari, O'Neil Securities Director] "Remember, she didnt give any pace. She just left it open, leaving herself every opportunity. She could shrink it a tiny tiny bit and say we have begun but it does not really matter because it is only a tiny bit. Yet she moved in the direction which is where I think she is gonna have to go."

Prior to this, Fed had announced the details of how it would unwind its balance sheets .

Efforts to reduce the balance sheet will entail allowing a capped level of proceeds from the bond portfolio to run off each month. The rest will be reinvested as usual. The program will start at $10 billion a month, including $6 billion in Treasuries and $4 billion in MBS, and increase quarterly to $50 billion. Fed officials estimate that once the program has run its course, the balance sheet likely still will exceed $2 trillion.

However, once Fed kickstarts the shrinking, three main concerns would arise. The first being the kind of impact the shrinking would bring to the market. The second being the kind of impact the shrinking would have on increasing interest rates. Lastly being the kind of impact the shrinking would have on the monetary policy that central banks are going to adopt. Yet, the Fed has always stressed that the shrinking of the $4.5 trillion balance sheet would be gradual, so it would not have much impact on the market. However, analysts warned that it is almost impossible for the shrinking to not disrupt the market.

For example, if the impact, after the unwinding, is larger than expected, it might cause investors to lose interest in the bond market. When that happens, the demand for bonds will decrease, following its price, thereby causing bond yields to soar. Indirectly, rates would be pushed up which would then disrupt Fed's impending interest rate hike. Ultimately, it would result in more uncertainty towards to the third interest rate hike. All these could be seen from the overnight dollar dip and gold increase.Yet, if the possibility of Fed's interest rate hike is bleak, coupled with the recent US political crisis and their weak economic data and alongside hawkish undertones of monetary policies implemented by global central banks, analysts believe that it is very likely that the dollar will further weaken. On the other hand, a persistent weak dollar would also lower the pressure for other major currencies, making it less urgent for major central banks such as European Central Bank and the Bank of England to raise their interest rates.

Another point that from yesterday's statement is a change in the way Fed is regard the inflation rate. Fed removed from its statement that inflation will decrease in "the near future". Instead it emphasized that "as a whole", inflation rate will go down. Furthermore, it also removed its claim that inflation rate would generally be below 2% and admitted that for this year, weakening of inflation rate would mostly likely persist.

Therefore, Fed's pessimism of the inflation rate has once again reinforced the market's belief that Fed is taking on a dovish stance. At present, judging from Fed's interest rate futures point of view, the probability that Fed would raise its interest rate in December is less than 50%. This also shows that the market is not optimistic about the third rate hike. Therefore, the market will be closely observing the upcoming balance sheet reduction in September, as well as, US economic data and inflation indicators.

[Gary Hufbauer, Peterson Institute For International Economics Reginald Jones Senior Fellow] "You know, the economy is doing okay but not going gangbusters. so there is not reason to accelerate either raise in interest rates or there will be another raise in interest rates."

(delete) Probably, possibly again in September but more likely in December. All pretty smooth as far as the FED is concerned. (delete)

CNBC's Qian Chen reporting from Singapore.