US Fed announces plan of $4.5 trillion balance sheet reduction

Bond yields had inched lower ahead of the Fed meeting, then jumped alongside the USA dollar after the bank suggested it is open to raising rates once more this year in December, and three times next year.

As widely expected, the Fed announced a decision to end the unprecedented quantitative easing program by gradually unwinding its $4.5 trillion balance sheet, from next month onwards, and shared that another interest rate hike is likely this year.

Stocks turned lower after the Federal Reserve's announcement. Inflation in consumer items besides food and energy - whose prices are more volatile and move around in response to commodities prices - has been below the Fed's target level of 2% for nearly the entire post-recession period.

Any comments on inflation could provide a signal about the likelihood third increase in the Fed's benchmark interest rate this year.

Despite the economic effects of hurricanes Harvey and Irma, the Fed said the economy would not be adversely affected in the long-run.

"A lot of people were thinking (the Fed) would pass in December", Silvia said.

"The basic message here is USA economic performance has been good", Yellen told reporters.

Fed officials also expect both low unemployment and low inflation to persist over the next several years, a curious combination that economists are struggling to understand. It also took note of the fact that inflation has weakened in recent months.

However, she cautioned, "The fact that inflation is unusually low this year does not mean that that's going to continue".

"For much of the past decade, the Fed has been the largest investor in mortgages in the world", said Mike Fratantoni, chief economist for the Mortgage Bankers Association.

With regard to the latter, it observed short-term disruption but stated that past experience suggested "that the storms are unlikely to materially alter the course of the national economy over the medium term".

The Federal Reserve voted Wednesday to keep key interest rates unchanged, but plans to reduce its U.S. Treasury bonds holdings next month. After that, the monthly reductions will remain steady. Still, no one is sure how the financial markets will respond over the long run. However, they are of the opinion that the storms would weigh on the economy only for a short span.

As expected, the Fed said it will begin shrinking its bloated $4.5 trillion portfolio in October by allowing $10 billion in bonds to mature without replacing them. "The question mark is in whether there will be any hints about the federal funds rate". Since December 2015, the Fed has modestly raised the rate four times.

Falling unemployment in major advanced economies and steady growth have reduced the need for emergency levels of monetary support.

As it did in June, the Fed continues to lean toward one more rate hike in 2017 and three more in 2018; however, the average year-end targets for the fed funds rate are slightly lower. Raising rates too quickly could risk hobbling the recovery.

Gold fell to its lowest level in over three weeks on Thursday as a stronger USA dollar and the increasing likelihood of another Federal Reserve interest rate hike this year curbed demand. The bank, though, has yet to achieve its other objective of stabilizing prices at a two per cent annual rate. Inflation has remained persistently below that level.

Yellen again declined to address speculation about whether President Trump will nominate her for a second four-year term leading the Fed. But Cohn appears to have fallen out of favor. And Yellen's press conference can be viewed here.

Fed Chair Janet Yellen has said the process will be gradual.

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