Rates unchanged - but stay alert

Carla Harmon
September 22, 2017

Also, as expected, the Fed said it would begin to reduce its massive holding of bonds and mortgage-backed securities in October.

USA gold futures for December delivery were flat at US$1,310.50 an ounce.

Given the Fed made no mention of any likely divergence from its expected path of three rate increases this year, most took this to mean a December rate hike remained on the table.

The US Federal Reserve kept its benchmark interest rate unchanged Wednesday and announced the end of a crisis-era stimulus program in a sign the economy is on sound footing and the central bank is ready to get back to business as usual.

As a effect, we continue to expect two 0.25% Fed funds rate hikes until the end of 2018, namely one in December of this year and one next June.

The Fed has given clear signals it will start to wind down its $4.5 trillion balance sheet, in what would be a symbolic moment for the central bank after nearly a decade of unconventional monetary policy.

At this week's meeting, the Fed will most likely announce that it will embark on a reduction of its balance sheet as of the fourth quarter 2017.

The Fed has said the "normalization" program is created to run in the background, to avoid roiling financial markets.

The Canadian dollar weakened against the greenback after Bank of Canada Deputy Governor Timothy Lane said the central bank will pay close attention to how the economy responds to both higher interest rates and a stronger Canadian dollar, and remains data-dependent as it looks ahead to further decisions on interest rates.

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

Bill O'Neill, co-founder of Logic Advisors, noted that speculative investors had added to their net long position in gold for nine straight weeks, making the market vulnerable to more selling. And though those revelations were not exactly unexpected, the everyday American is wondering: how are future rate hikes going to hit me in the wallet, and how can I protect myself? Currently, the market is giving it a 1.4% chance of a rate hike.

According to NY Times, the Fed still expects low unemployment and low inflation to sustain for a few more years.

"Indeed, based on the Fed's current plans, the balance sheet would still be as large as $US3 trillion in four years' time."

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

On top of that, the devastation caused by recent severe hurricanes could make it hard for Fed policymakers to get a solid read on the economy in the coming weeks as they decide whether to enact another small hike in a key interest rate.

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