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Fed To Start Unwinding Balance Sheet Next Month, Keeps Rate Views

24 September 2017

That means that mortgage rates would rise up only modestly over time.

The U.S. central bank also said it would start to reduce its $4.2 trillion worth of bond holdings that ballooned through three rounds of quantitative easing. The Fed policymakers' updated economic forecasts show an expectation for three more rate increases in 2018.

"I don't anticipate any sudden or large effects on rates or spreads or things like that as we normalise", Williams, president of the San Francisco Federal Reserve, told reporters in Zurich. But they've risen sharply from 2017 lows over the past few weeks, lifting bank stocks. The yield on Germany's 10-year government, the benchmark for the region, was 4 basis points higher at 0.47 per cent, its highest since early August. The news of a potential rate hike surprised markets, especially given that inflation has been fixed below the Fed's 2% target; one of the Fed's mandates is price stability.

That said, not all experts are confident that the Fed has a handle on the situation. While the interest rate outlook for next year remained largely unchanged in the Fed's latest projections, with three rises envisioned in 2018, the USA central bank did slow the pace of anticipated monetary tightening expected thereafter. "If that happens, then USA rates are likely to rise".

She said the Fed would adjust its policymaking if it thought the causes of low inflation had become permanent. She also predicted the US economy would suffer a notable degree of short-term damage from the impact of Hurricanes Irma, Harvey and Maria.

That Yellen is now confident enough to begin reversing QE and removing the $4.5 trillion worth of assets from the Fed's balance sheet, suggests the program has been a success. That figure would inch up by $10 billion each quarter until it reaches $50 billion in monthly reductions in October 2018.

Spendlove noted that the Fed has telegraphed its move for months in an effort to prepare investors for it. Still, no one is sure how the financial markets will respond over the long run.

The gold price and interest rates / bond yields usually move in the opposite direction as gold produces no income and investors have to rely on price appreciation to book returns.

Inflation is expected to remain under the Fed's 2 percent target through next year before hitting it in 2019. "Beyond December, policy is even more uncertain as we wait to see who Trump appoints to the Fed".

Fed officials have been signaling for months that they planned to start reducing the Treasury bonds and mortgage-backed securities the central bank began buying in 2008 to try to stimulate growth by pushing down mortgage and other long-term interest rates.

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

It remains to be seen whether interest rates will actually follow this path, but if they do, it'd be very good for banks' top and bottom lines, as well as their stock prices. The most recent increase took place in June. The federal reserve kept its interest rates constant as expected. The U.S. Federal Reserve will resume rate hikes in December and raise borrowing costs three more times in 2018, a Reuters poll found on September 20. Inflation has remained persistently below that level. But the Fed Chair still doesn't have a definitive answer when it comes to inflation or raising rates.

Fed To Start Unwinding Balance Sheet Next Month, Keeps Rate Views