Economy

Fed conflicted by weak USA inflation, global economic rebound

Fed conflicted by weak USA inflation, global economic rebound”

At 11.30am, the yield on the R186 was at 8.400% from 8.385% and the R207 was at 7.065% from 7.0500%. According to investment bank Jefferies, which issues bold forecasts for what the Fed will do, it is likely the Fed will keep interest rates unchanged, but announce that it will stop reinvesting interest income in new assets.

The central bank is going to trim the balance sheet by $10 billion-a-month for the first three months, $20 billion-per-month for the next three, and on and on until it hits a pace of $50 billion per month.

"Relative to the June forecasts there may be more participants anticipating no more hikes this year, but we don't think so many will switch to this view as to bring down the median", said Michael Feroli, chief USA economist at JP Morgan.

It forecasts only two increases in 2019 and one in 2020.

Federal Reserve Chairwoman Janet Yellen on Wednesday warned millions of Americans to scrupulously monitor their credit reports following a "very serious data breach" at Equifax.

"Clearly the Fed still believes that lower unemployment will eventually translate into a pick-up in inflation, but if inflation continues to undershoot it is hard to see the Fed following through on a hike", he said. At present, the market has a 60% expectation of a rate hike in December.

The Fed's balance sheet has reached $4.5 trillion - roughly five times its size before the financial crisis erupted in 2008.

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"The start to reducing the Fed's balance sheet is an action the markets are ready for", said Diane Swonk, chief economist at DS Economics.

Yellen said it would take a "a material deterioration" in the economy's performance for the Fed to reverse a schedule that she expects to proceed "gradually and predictably". As a result, financial markets are unsure whether the Fed will raise rates again before year's end.

"Rate hikes with quantitative tightening will be a lot of tightening for the markets to digest", Anderson said.

The Fed noted that the recent hurricanes in the United States would affect economic activity but are "unlikely to materially alter the course of the national economy over the medium term".

Bond and stock markets were little changed in early trading and the dollar was largely flat against a basket of currencies.

Minutes from recent Fed meetings have shown a growing split, with some policymakers saying there is no urgency to raise rates after a drop in inflation, and others arguing the USA economy is strong enough to continue "normalizing" monetary policy. The jobless rate is just 4.4 percent, near a 16-year low.



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