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Fed to start unwinding bond portfolio

22 September 2017

Nonetheless, inflation continues to stay well below the European Central Bank's target of "below, but close to 2 percent".

She added that if the inflation shortfall does prove persistent then "it will be necessary to adjust monetary policy to address that". But the August increase in consumer prices was in large part driven by volatile energy prices.

Add it all together and the message is this: The Fed is simply unwilling to see just how low the unemployment rate can go without stoking higher inflation.

The Federal Reserve on Wednesday said it will hold short-term interest rates steady for the time being.

Treasuries tumbled while the dollar surged after the Federal Reserve struck a more hawkish tone than markets anticipated.

Here's the new Fed dot plot, with the June plot for comparison.

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Fed officials continue to expect that the USA economy will expand at a moderate pace in the future.

But Yellen also admitted that policymakers' "understanding of the forces driving inflation isn't ideal", and that the Fed will continue to carefully monitor readings going forward. But continuing ultra-low interest rates or bond-purchase programs for too long could spark a sudden and sharp increase in prices.

But economists and Fed officials say the storms will not affect the underlying trend in growth, which has been steady at around two percent in recent years, and activity should rebound later in the year due to reconstruction efforts.

U.S. Federal Reserve on Wednesday kept the interest rate unchanged, but signaled that there might be one more interest rate hike this year.

Still, "going into the meeting, investors may have expected a more dovish outcome - especially on the interest rate projections", said Steven Friedman, a senior economist at BNP Paribas Asset Management.

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

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It would start with reductions of $10 billion a month - $6 billion in Treasurys and $4 billion in mortgage bonds - and raise the amount quarterly until it reached $50 billion a year later. On the Nasdaq, 1,515 issues rose and 1,177 fell.

Hurricanes are unlikely to materially impact economy in medium term, according to the Fed's statement.

Elevated risk appetite in Europe meanwhile saw the gap between Portuguese and Italian 10-year government bond yields narrow to levels not seen since the start of the eurozone debt crisis of 2010-2012. The caution in raising rates comes as inflation has consistently stayed below the Fed target of 2 percent. The markets have embraced and started to accept that the Fed's balance sheet will start to move lower.

YDSTIE: A Fed research paper found quantitative easing lowered long-term interest rates by a full percentage point. The Standard & Poor's 500 index inched up 0.1 percent to 2,508.24 and the Dow Jones industrial average rose 0.2 percent to 22,412.59.

"Hurricanes Harvey, Irma and Maria have devastated many communities, inflicting severe hardship", Fed officials said in a policy statement Wednesday after their two-day meeting. MSCI's index of world stocks was last up 0.2 percent and hit an intraday record high of 487.07.

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Fed to start unwinding bond portfolio