Fed to Reduce Bond Holdings, Setting Stage for Higher Mortgage Rates

Andrew Cummings
September 21, 2017

But Fed Chair Janet Yellen was clear that those forecasts are not etched in stone.

"The Fed has firmly signalled that a December rate rise is still on the table, but it will be hard for investors to put too much faith in this forecast while there is still plenty of time for it to change its mind", said Luke Bartholomew, investment strategist at Aberdeen Standard Investments.

While the Fed admitted storm-related disruptions would have a short-term impact, it said it did not expect the Hurricanes Harvey and Irma would "materially alter the course of the national economy over the medium term".

But the central bank did take historic action on Wednesday: It will begin undoing the extraordinary steps it took to prop up the economy for nearly a decade after the financial crisis.


Oil prices were higher.

Stocks had been mostly flat ahead of the Fed statement, while the dollar had been slightly lower.

"The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate", Federal Reserve stated in last meet on 25-26 July 2017. But they still are forecasting another increase of 0.25 of a percentage point by the end of the year - a signal they think the economy is still on solid ground.

Investors will be watching domestically for second-quarter gross domestic product figures which are expected to show economic growth accelerated to a quarterly pace of 0.8 percent from 0.6 percent in March.


Despite not raising rates, the Fed indicated that if persistently low inflation rebounds, it may hike rates one more time this year and three times in 2018.

"Job gains have remained solid in recent months, and the unemployment rate has stayed low", the Fed said in a statement.

On Wednesday, the Fed announced it would begin the reductions next month based on a plan approved in June.

Bank of Nova Scotia economists believe that with the Fed sounding surprisingly hawkish, the Bank of Canada may have fewer reasons to fear additional gains by the Canadian dollar if the central bank continues to raise Canadian rates.


Bond yields rose following the Fed's announcement Wednesday. And the Fed will not be selling securities, but rather letting the debt mature and roll off its balance sheet. From next month the Fed will unwind its holdings of US Treasurys and mortgage-backed securities at an initial rate of $10 billion a month to a maximum of $50 billion a month.

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