Fed to start unwinding bond portfolio

A trader works on the floor of the NYSE in New York

As expected, it said it would begin in October to reduce its approximately $4.2 trillion in holdings of U.S. Treasury bonds and mortgage-backed securities by initially cutting up to $10 billion each month from the amount of maturing securities it reinvests.

Europe market opened tad higher on Thursday as the Federal Reserve announced its plan to start unwinding its balance sheet and hinted that the Fed will be introducing another interest rate hike in the current year.

Hurricane's Harvey and Irma have left a slough of destruction in the wake, all of which will impact on economic growth and will favour a cheaper borrowing climate to rebuild, encouraging the Fed to stand still on rates.

He said: "We would not be surprised to see them give further details on this policy, but we do not expect then to give a firm date on when this will happen". That neutral rate dropped to 2.9 percent in the new forecast, down from 3 percent in the Fed's June forecast. After leaving its benchmark rate at a record low for seven years after the 2008 crisis, the bank has modestly raised the rate four times since December 2015 to a still-low range of one per cent to 1.25 per cent.

United States stocks are poised for a mixed start after another higher finish on Tuesday as all eyes will be on Janet Yellen and the Fed press conference at 2.30pm EST.

"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".

In July, the core personal consumption expenditure (PCE) index, Fed's favor inflation indicator, rose only 1.4 percent year on year, below Fed's two percent target and also lower than the 1.9 percent in January. An inflation rate of 2 percent is the Fed's general goal, and a benchmark for gauging economic health to raise rates.




"It doesn't get any more brazenly hawkish from Dr Yellen, who along with the majority of her colleagues is clearly in the December rate hike camp and the markets are reacting to this news", said Stephen Innes, head of Asia-Pacific trading at OANDA. "So there's a little adjustment going on there", said David Joy, chief market strategist at Ameriprise Financial in Boston.

Yellen earlier this year blamed temporary factors, such as the introduction of cheaper mobile phone plans, for the persistence of undesirably low inflation.

Months of telegraphing by the central bank allowed for the muted market response seen on Wednesday.

Inflation data remains pivotal for the Fed policy framework but is expected to rise only gradually.

The move to unwind the portfolio the Fed acquired during its crisis-era bond-buying programmes was widely anticipated.

She also said if prices rose too quickly the bank would be able to lift rates quicker. Considering the Fed's balance sheet now stands $4.5 trillion, the Fed is envisioning a slow, multi-year process. Chart 2 shows the real policy rate for their central banks. The further the interest rates are from the zero lower bound, the bigger will the room be for balance sheet normalization. Yellen's four-year term as chair will end on February 3. It is now projecting long-term below 2%.

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