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Federal Reserve keeps interest rates unchanged

22 September 2017

As the Federal Reserve signals an end to its decade of unconventional monetary stimulus, divergence between the policies of the US and Asian central banks is growing, a stark contrast to an era when regional rate moves closely tracked the United States.

While some investors said the Fed's tone was more hawkish than expected others were happy Fed Chair Janet Yellen reiterated her stance that balance sheet reduction would be data dependent.

The market started this week amid increased expectations of one more interest rate hike in 2017.

On Wednesday, the Fed left rates unchanged, hovering between 1% and 1.25%.

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.

According to Fed officials' projections, the core PCE index is expected to rise 1.5 percent this year and 1.9 percent next year, lower than the 1.7 percent and 2 percent forecasts in June.

"The hint of a rate hike in December was no surprise to us and we reiterate our stand, that it is not likely to unravel the market's bullish posture in anticipation of tax cuts", said Peter Cardillo, chief market economist at First Standard Financial.

"The Fed took another step on its path of lovely 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. They now expect there will likely be two hikes, down from three.

In its policy statement, the Fed took note of Hurricanes Harvey, Irma and Maria which it said had devastated many communities. That's the point at which its benchmark rate is considered to be neither stimulating economic growth nor restraining it. One vacancy about to open is the seat of Vice Chairman Stanley Fischer, who is stepping down next month.

Something amusing happened at the September Federal Reserve meeting: The central bank's resolve to raise interest rates appeared to rise, even as the bank's own forecasts pointed to arguments against doing so.

In response to the Great Recession in 2008, the Fed built up its portfolio of government and mortgage-backed bonds.

At 2:58 p.m. ET, the Dow Jones Industrial Average fell 36.4 points, or 0.16 percent, to 22,376.19, the S&P 500 lost 4.73 points, or 0.19 percent, to 2,503.51 and the Nasdaq Composite dropped 21.34 points, or 0.33 percent, to 6,434.71.

Financial markets are largely subdued as investors remain cautious ahead of the Federal Reserve's announcement of its monetary policy meeting.

Futures markets are now pointing to a 60.5% chance of a December rate increase, according to Bloomberg's World Interest Rate Probability data.

While the decision to shrink the Fed's balance sheet is much expected, when and how the Fed will manipulate its target for short-term interest rates is less clear.

The S&P and the Dow ended slightly higher on Wednesday, adding to their string of closing records, while the tech-heavy Nasdaq ended slightly lower weighed down by Apple. Germany's DAX Index rose 0.3 percent, while France's CAC 40 Index climbed 0.5 percent. The S&P 500 strengthened as the week progressed.

The dollar was also trading in narrow ranges, edging down to 111.50 yen from 111.58 yen the day before.

Federal Reserve keeps interest rates unchanged