Fed keeps US rates steady, to unwind portfolio in October

Fed keeps US rates steady, to unwind portfolio in October”

When the Federal Reserve meets this week, it's sure to take account of the economic consequences of two devastating hurricanes.

President Donald Trump has indicated that he is considering asking Yellen to serve another term.

It is, in a way, a kind of mini rate hike.

The plan starting next month will gradually reduce the size of the Fed's Dollars 4.5 trillion in investment holdings, which were built up during the financial crisis. It bought the bonds to try to hold down mortgage and other loan rates and support a fragile economy. Now, with a far healthier economy, the Fed wants to begin shrinking its portfolio. The move will gradually increase long-term borrowing rates.

The Fed has said the "normalization" program is created to run in the background, to avoid roiling financial markets. "The Fed has laid out a roadmap, and there is really a sense of relief to finally get it started". At this rate, the Fed's balance sheet would still be above $3 trillion by late 2019.

"A lot of people were thinking (the Fed) would pass in December", Silvia said. "I will not say that the committee clearly understands what the causes are".

In their new set of projections, Fed officials estimated three quarter-point rate hikes would be appropriate next year - the same number they saw in June - based on the median in the so-called dot plot of interest-rate forecasts.

Interest rate futures traders are now pricing in a 72-percent chance of a December rate hike, up from roughly 60 percent before the statement, according to the CME Group 's FedWatch Tool. The unemployment rate is just 4.4 percent, near a 16-year low. Earlier, EUR climbed as high as 1.2033 as markets initially reacted to the Fed decision to keep rates on hold. Inflation has remained persistently below that level.

"Despite the Fed's well-choreographed message today, bond yields are apt to rise if inflation accelerates and if central banks appear to be moving in unison to tighten monetary policy in 2018". Anyone ruling out a December rate increase "is mispricing the real desire on the part of the Fed to continue" normalizing monetary policy despite the dip in inflation, said Jason Celente, senior portfolio manager at Insight Investment.

The Fed also said it would begin in October to reduce its approximately $4.2 trillion in holdings of U.S. Treasury bonds and mortgage-backed securities acquired in the years after the 2008 financial crisis. They now expect there will likely be two hikes, down from three.

Some traders and investors had thought the Fed might have struck a more dovish tone given the potential economic impact of recent severe hurricanes and still sluggish inflation.

Yellen again declined to address speculation about whether President Trump will nominate her for a second four-year term leading the Fed.

Yellen said the recent data breach points to the importance for strong cybersecurity controls - and that the Fed and other regulators are focused on ensuring banks have them in place, she noted.

The seven-member Fed board will soon have four openings, after the announcement this month by Stanley Fischer that he is stepping down as vice chairman.

When asked about her future, Yellen, the first woman to lead the Fed, has said only that she intends to serve out her term as chair. Those selections would afford him an unusual opportunity to impose his personal stamp on the world's most powerful central bank.

While its commentary was of importance to financial markets, so too was the information on the unwinding of its stimulus programme.

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