Fed keeps US rates steady, to cut portfolio in October

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The US 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 low inflation.

The Fed, as expected, also said it would begin in October to reduce its approximately 4.2 trillion US dollars in holdings of US Treasury bonds and mortgage-backed securities acquired in the years after the 2008 financial crisis.

New economic projections released after the Fed’s two-day policy meeting showed 11 of 16 officials see the “appropriate” level for the federal funds rate, the central bank’s benchmark interest rate, to be in a range between 1.25 and 1.5 percent by the end of 2017, or 0.25 percentage points above the current level.

US bond yields rose, pushing up the US dollar after the Fed’s decision, but US benchmark stock indexes were little changed.

US benchmark 10-year Treasury note yields rose as far as 2.29 percent, the highest since August 8, a move which helped push bank stock prices higher also.

“The Fed took another step on its path of beautiful 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.

In its policy statement, the Fed cited low unemployment, growth in business investment, and an economic expansion that has been moderate but durable this year as justifying it’s decision. It added that the near-term risks to the economic outlook remained “roughly balanced” but said it was “closely” watching inflation.

Fed Chair Janet Yellen said in a press conference after the end of the meeting that the fall in inflation this year remained a mystery, adding that the central bank was ready to change the interest rate outlook if needed.

“What we need to figure out is whether the factors that have lowered inflation are likely to prove persistent,” she said. If they do, “it would require an alteration of monetary policy,” Yellen said.

Federal Reserve Board Chairwoman Janet Yellen speaks during a news conference following a meeting of the Federal Open Market Committee in Washington, DC, September 20, 2017. /VCG Photo

While the interest rate outlook for next year remained largely unchanged in the Fed’s latest projections, with three rises envisioned in 2018, the US central bank did slow the pace of anticipated monetary tightening expected thereafter.

It forecasts only two increases in 2019 and one in 2020. It also lowered again its estimated long-term “neutral” interest rate from 3 to 2.75 percent, reflecting concerns about overall economic vitality.

“The US Federal Reserve has firmly signaled that a December rate rise is still on the table,” said Luke Bartholomew, of Aberdeen Standard Investments Investment Strategist in London.

“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.

The US Federal Reserve will resume rate hikes in December and raise borrowing costs three more times in 2018, a Reuters poll found on Wednesday.

The US central bank will also reduce the size of its asset stock pile by about 1.4 trillion US dollars over the next several years as it seeks to restore a normal environment for monetary policy, according to the poll of Wall Street’s top banks taken after the Fed’s latest policy meeting, which ended on Wednesday.

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Source(s): Reuters