Fed Stands Pat On Rates, Will Reduce Balance Sheet In October

Fed Stands Pat On Rates, Will Reduce Balance Sheet In October”

The Fed said it would begin shedding some of the $4.5 trillion in investments starting next month.

With it being considered aprevious conclusionthat United States interest rates will be left unchanged in September, much attention will likely be directed towards the Fed's forward guidance, for clues on future monetary policy.

For years, the central bank piled up purchases of Treasury and mortgage-backed securities, a strategy meant to stimulate the economy by reducing borrowing costs for everyone.

"The Fed took another step on its path of lovely normalization, announcing that the gradual balance sheet reduction will start next month and limiting revisions to both projections and policy guidance", said Mohamed El-Erian, Chief Economic Adviser At Allianz, in California. As the jobless rate improved, interest rates have been raised, but remain below historic averages. Raising rates too quickly could risk hobbling the recovery. Gross domestic product is now expected to grow at a rate of 2.4 percent this year, 2.1 percent next year and 2.0 percent in 2019.

The central bank expected the Hurricanes Harvey, Irma and Maris to affect USA economy in the near term, but would not alter the course of the economy in the medium term. US stock indexes notched record highs again on Monday, while the Japanese yen and gold weakened.

During the 2008 financial crisis, Washington slashed the key interest rate almost to zero in a bid to boost growth and jobs.

Some analysts thought the Fed might would raise interest rates today because of Chairman Yellen's press conference. But he has also said he is considering other candidates, notably Gary Cohn, head of Trump's National Economic Council.

In addition, the risk that Federal Reserve Chairwoman Janet Yellen "takes a more dismissive line toward the downside surprises in the inflation data" could surprise those expecting a more dovish tilt, wrote Matthew Hornbach, an interest-rate strategist for Morgan Stanley. "I will not say that the committee clearly understands what the causes are".

While the Fed prepares to embark on a form of monetary tightening, some central banks look nowhere near taking their feet off the pedal. A critical question is whether the Fed has grown troubled or confused about chronically low inflation. That's the point at which its benchmark rate is considered to be neither stimulating economic growth nor restraining it.

Fed officials cautioned that they do expect inflation to be higher than normal - at least for a little while - following the hurricanes that have devastated Texas, Florida and now Puerto Rico.

The U.S. dollar rose against a basket of currencies .DXY after the release of the Fed's policy statement.

The central bank also announced it would next month begin cutting back on its holdings of bonds and other assets built up as part of a scheme to keep rates low and steer the economy through the global financial crisis a decade ago. It now projects even faster growth this year of 2.4 percent, an increase from it forecast of 2.1 percent earlier this year.

If Trump chooses not to offer Yellen a second term - or if she declines, if asked - he would be able to name five of the Fed's seven board members in his first year in office.

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