Economy

Fed to start modestly reducing bond holdings

Fed to start modestly reducing bond holdings”

Stocks overcame an afternoon wobble to close mostly higher after the Federal Reserve said it would start reducing its huge bond portfolio next month and was still on track to raise interest rates later this year.

Most economists don't expect the Fed to raise interest rates on Wednesday.

The Dow Jones finished Wednesday up 41 at 22,412 - a new record - after the Fed left interest rates on hold this month, but the prospects remains it will happen this year.

The US Federal Reserve is the first central bank to indicate it believes its economy can withstand a tightening of monetary policy, given the US economy is seeing comfortable signs of recovery.

"We are working down our balance sheet because we feel stimulus is no longer needed", she added.

A narrower interest rate gap between China and the United States, a stronger U.S. dollar and reduced liquidity in worldwide markets from the Fed's move will all turn into headwinds for Beijing to contain financial risks at home, according to Iris Pang, chief Greater China economist at the banking and financial services firm ING in Hong Kong.

The Fed also said it will begin to roll off its $4.5 trillion balance sheet in October.

The other reason the Fed may not raise its fed funds rate this week: Hurricanes Harvey and Irma are expected to ding the USA economy in the short-term.

The Commerce Department reports on August housing starts and the current account-trade deficit for the second quarter.

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

In its policy statement, the Fed took note of Harvey, Irma and Hurricane Maria, which it said had devastated many communities.

The Sit Rising Rate ETF is created to capitalize on rising rates by holding derivative hedges tied to two-, five- and 10-year U.S. Treasuries. That neutral rate dropped to 2.9 percent in the new forecast, down from 3 percent in the Fed's June forecast.

Fed Chair Janet Yellen said in a press conference after the meeting that a fall in inflation this year remained a mystery and said the USA central bank was ready to change the rate outlook if needed.

While the storms will temporarily boost inflation thanks to higher prices for gasoline and other items, "apart from that effect, inflation on a 12-month basis is expected to remain somewhat below 2 per cent in the near term but to stabilise around the committee's 2 per cent objective over the medium term", the Fed said.

In other words, inflation is signaling that the Fed should not increase rates.

Officials predicted unemployment will stay near 4 percent for the next three years.

The Fed's preferred measure of prices increased by just 1.4 percent during the 12 months ending in July, the most recent available data. That helped send bank stocks higher. After that, the monthly reductions will remain steady. "Household spending has been expanding at a moderate rate, and growth in business fixed investment has picked up in recent quarters". The Fed, under Chair Janet Yellen, has set its own pace and agenda. President Donald Trump is expected to announce a nominee, who must be confirmed by the U.S. Senate, within weeks. Yellen declined to comment on her plans in answering reporters' questions after the FOMC announcement.

Under law, Fed governors are appointed to staggered 14-year terms, and the chair serves a four-year term that is not concurrent with presidential administrations. Part of the reason for this pattern is continuity. "Thus, unless there is a new economic shock, market expectations will have to adjust to the Fed's thinking".



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