Published: Thu, September 21, 2017
Business | By Max Garcia

US Federal Reserve to start unwinding $4.2tn stimulus from October

US Federal Reserve to start unwinding $4.2tn stimulus from October

The US Federal Reserve Bank is in the middle of its two-day policy meeting and there is some uncertainty about exactly what the outcome of that meeting will be.

The central bank expected the Hurricanes Harvey, Irma and Maris to affect U.S. economy in the near term, but would not alter the course of the economy in the medium term.

The Fed did lower its projection for its so-called neutral rate.

Despite almost seven years of uninterrupted job creation and a very low unemployment rate of 4.3 per cent, inflationary pressures and wage gains have been tepid at best, something that has baffled economists given the strong labor market.

The prospect of another Fed rate hike this year at a time when the US economy is growing modestly and may slow somewhat from the impact of hurricanes Harvey and Irma, could be bad news for stocks the next few weeks, Chalupnik said.

"Despite the Fed's well-choreographed message today, bond yields are apt to rise if inflation accelerates and if central banks appear to be moving in unison to tighten monetary policy in 2018".

BONDS: U.S. Treasury yields rise, ten year rises to 2.27 percent, the highest since August 16.

Information received since the Federal Open Market Committee met in July indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year.

Ultimately, there are three reasons why we expect only minor dovish changes.

As the Fed has already communicated extensively about its plan for a gradual and predictable runoff, we expect markets to focus instead on the outlook for the federal funds rate.

Regarding the prospects for another 25 basis point interest rate hike in 2017, policymakers" "median' projection for the Fed funds rate was unchanged from June, at 1.4%.

And the Fed will not be selling securities, but will simply let the debt mature and roll off its balance sheet. The UK 10-year gilt was at 1.2839% from 1.3003%.

"They have been very cautious", Drew Matus, chief market strategist at MetLife Investments, said before the announcement. A looming battle at the end of the year over the US government's debt limit and spending also could further disrupt markets.

The Fed also is likely to announce a scheduled reduction of its approximately $4.2 trillion in holdings of bonds and mortgage-backed securities, most of it accumulated in response to the 2007-2009 financial crisis and recession. The Fed anticipates ending the runoff at some point, though it doesn't yet have a specific date. It also now thinks that the eurozone will grow by 2.1 percent this year, 0.3 percentage point more than its previous prediction in June. They have missed the target for most of the past five years. Economists had also forecast that Fed policy makers would maintain their projection for one more rate increase this year, and take that action in December.

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