Not so rosy long-term consequences for Dollars from the Fed policy

USDSep19fedrates

USDSep19fedrates

The Federal Reserve voted unanimously to start shrinking its balance sheet next month but indicated only one further interest rise this year.

According to the well-telegraphed plan, the Fed will start by trimming no more than $10 billion per month from its balance sheet, with that cap rising each quarter for a year, until it hits $50 billion per month.

"What we need to figure out is whether the factors that have lowered inflation are likely to prove persistent", Fed chair Janet Yellen said at a press conference after the meeting.

Fed-fund futures tracked by CME Group, which are used by investors to bet on central bank policy, showed investors now see a 73.4% chance of higher USA interest rates by the end of 2017, compared with 57.7% a day earlier. "It is obvious Yellen and the Fed are perplexed about the current environment as it relates to inflation", said First Franklin's Brett Ewing in a note.

In the bond market, treasuries are regaining ground after coming under pressure following yesterday's Fed announcement.

She also predicted the USA economy would suffer a notable degree of short-term damage from the impact of Hurricanes Irma, Harvey and Maria.

Anticipation of this week´s monetary policy meeting also saw USA bond yields rise in recent days, with investors expecting the Fed will start gradually tightening the money supply.

If it falls within the rate at the end of the year, this will be the fourth turn of the screw since the election of Donald Trump in November 2016. "The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labour market conditions and a sustained return to 2 percent inflation", the policy statement noted.

"The Fed will likely stick to its intent of hiking rates one more time in 2017 and three more times in 2018".

About 5.8 billion shares changed hands on US exchanges.

The dollar index rose 0.75 percent, with the euro down 0.03 percent to $1.1888.

"The Fed's forecasts imply the bank is unwilling to freeze interest rates in an experiment to see how low unemployment can go without stoking inflation", MarketWatch said.

The Federal Open Market Committee (FOMC) held its sixth meeting on Wednesday to discuss monetary policy and the potential of an interest rate hike, which is expected to happen at least once before the close of 2017.

In overseas trading, stock markets across the Asia-Pacific region moved mostly lower on Thursday.

In Asia, stock markets diverged on Thursday in morning session after the Fed announced that it would begin paring back its balance sheet in October.

Some Fed officials have warned against raising interest rates until inflation - which reflects the prices of everything from meat and cheese to houses and cars - meets the goal of 2% that they consider healthy for the economy.

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