Federal Reserve reveals start of balance sheet reduction in October

Federal Reserve reveals start of balance sheet reduction in October

Andrew Cummings
September 21, 2017

The U.S. Federal Reserve left interest rates unchanged on Wednesday but signaled it still expects one more increase by the end of the year despite a recent bout of weak inflation, APA reports quoting Reuters.

Markets are pricing in a 58-percent probability of the Fed raising rates in December, according to the CME Group's FedWatch tool.

The u.s. federal Reserve (Fed) took the historic decision Wednesday to turn the page of the stimulus money that has sustained the u.s. economy since the financial crisis of 2008 and has proved to be more optimistic for growth this year.

One more increase to range between 1.25 and 1.50 percent is likely before the end of the calendar year, which is about a quarter-point increase over the central bank's current benchmark. MSCI's gauge of stocks across the globe shed 0.25 percent.

With the Fed due to release its latest policy statement at 2 p.m. ET (1800 GMT), caution prevailed.

In its policy statement, the Fed said while hurricanes Harvey, Irma and Maria have been devastating, history suggests the monster storms will likely have little effect on the national economy over the long haul. "This time the market adjusted to the Fed's outlook", said Brent Schutte, chief investment strategist with Northwestern Mutual Wealth Management Co. Over 2017, Fed policymakers have been dealing with unexpected weakness in inflation despite a very low jobless rate. It also now thinks that the eurozone will grow by 2.1 per cent this year, 0.3 percentage point more than its previous prediction in June.

Boockvar pointed out that seven years ago, former Fed Chair Ben Bernanke said the central bank wasn't monetizing debt because its quantitative easing program was temporary. "In view of realized and expected labor market conditions and inflation, the Committee chose to maintain the target range for the federal funds rate at 1 to 1.25 percent".

"They just have to be very careful because it's a highly levered US economy".

"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.

Against a basket of currencies, the US dollar edged towards 2-1/2-year lows hit earlier this month as investors waited to see whether the Fed this afternoon would signal tighter monetary policy or hold off because of tepid inflation data.

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