Fed prepares to unwind $4.2 trillion in bond holdings

Passersby are reflected in an electronic stock quotation board outside a brokerage in Tokyo

Passersby are reflected in an electronic stock quotation board outside a brokerage in Tokyo

The dollar index rose 0.75 percent, with the euro down 0.83 percent to $1.1892.

U.S. stocks have continued to climb this year, with the S&P up about 12 percent so far, helped by strong corporate profits and optimism that U.S. President Donald Trump will cut business taxes.

In October, the Committee will initiate the balance sheet normalization program described in the June 2017 Addendum to the Committee's Policy Normalization Principles and Plans.

"We maintain our positive view on equities and have recently increased allocations given improving earnings per share, support from fiscal stimulus and Fed dovishness", Humberto Garcia, Head of Global Asset Allocation for Leumi Investment Services Inc., said in a note. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

US central bankers are counting on steady growth and low unemployment to raise inflation closer to their goal, which would support their policy of gradual tightening through interest-rate increases and a reversal of quantitative easing. But history suggests those effects will prove to be temporary, she said.

Ms Yellen said that, if they do, "it would require an adjustment of monetary policy".

While the interest rate outlook for next year remained largely unchanged in the Fed's latest projections, with three rises envisioned in 2018, the US central bank did slow the pace of anticipated monetary tightening expected thereafter. The Fed reiterated that interest rates are likely to rise at a "gradual" pace, though updated forecasts indicated that officials see the path as less steep than before. It also lowered again its estimated long-term "neutral" interest rate from 3.0 percent to 2.75 percent, reflecting concerns about overall economic vitality.

Futures markets are now pointing to a 60.5% chance of a December rate increase, according to Bloomberg's World Interest Rate Probability data.

"Before the Fed announced its decision, there were high expectations that monetary policymakers would drag interest rate expectations lower for 2017", said Hussein Sayed, chief market strategist at FXTM.

As expected, the Fed said it will begin shrinking its bloated USD4.5 trillion portfolio in October by allowing USD10 billion in bonds to mature without replacing them.

"There may be some speculation towards the Fed sounding slightly dovish, but over the last few weeks hawkish rhetoric has come into vogue globally as demonstrated by the Bank of Canada and Bank of England", he said.

"Job gains have remained solid in recent months, and the unemployment rate has stayed low", the Fed said in a statement. The Fed has raised rates twice this year.

Fed officials cautioned that the devastation of Hurricanes Harvey, Irma and Maria would hold back the US economy in the "near term". The unemployment rate is just 4.4 percent, near a 16-year low. The decision, which was widely expected, was approved in an 8-1 vote, with one new board member unexpectedly dissenting, saying the measures weren't aggressive enough.

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