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Fed asset-shrinking to start next month; rate hike seen in '17

21 September 2017

The Fed later decided it needed to do more to support the economic recovery, and over the next three years it launched two other bond-buying rounds to lower long-term interest rates and keep inflation from going below zero.

While the central bank left rates unchanged, it cited low unemployment, growth in business investment and an economic expansion that has been moderate but durable this year to build its case for another rate hike in 2017.

There are several vacancies on the Fed board, and there could be a change in leadership early next year if President Donald Trump decides not to renominate Chair Janet Yellen.

The balance sheet is now roughly five times the size of its pre-recession level.

"The Fed's balance sheet will finally be turning a corner", said Brian Jacobsen, senior investment strategist at Wells Fargo Asset Management in Menomonee Falls, Wisconsin. Those amounts will increase by $10 billion each quarter to a maximum of $50 billion.

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On its holdings of agency debt and mortgage-backed securities by $4bn initially, then increasing by $4bn in three-monthly steps until reaching $20bn a month. But they are more confident that Yellen, who has spent much of her career at the Fed, would accept a second term.

Fundamentally, the economic backdrop for the United States and globally remains positive, and this type of backdrop generally leads toward a constructive view on risk assets.

While the storms will temporarily boost inflation thanks to higher prices for gasoline and other items, "apart from that effect, inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the committee's 2 percent objective over the medium term", the Fed said.

The U.S. 2-year Treasury yield hit a high of 1.430 percent, its highest level since July 6.

That would mean the Fed would end up selling only around $1 trillion to $2 trillion in securities after having added $3.7 trillion between 2008 and 2014. That neutral rate dropped to 2.9 percent in the new forecast, down from 3 percent in the Fed's June forecast. Surveys of economists show they do not expect the Fed to raise interest rates at this time. All of this could put upward pressure on mortgage rates over the next few weeks, but there are no givens on what will actually unfold. Of course, it's worth noting that the Fed has telegraphed its plans before and deviated from the projected path. "The job figures...assures that interest rates will remain low for a longer period". "The basic message here is US economic performance has been good", Fed Chairwoman Janet Yellen said at a press conference after a two-day policy meeting that ended Wednesday.

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Early Thursday, the Bank of Japan will release its interest rate decision and monetary policy statement. These factors will impact data, but they aren't ultimately the primary drivers of policy.

He said better than expected United States inflation figures had also fuelled the rate hike expectations.

"The focus was on the Fed's thoughts on inflation and any implications for the pace of tightening outlined in the "dot plot".

The opinions and forecasts herein are provided exclusively for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and global developments.

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