Wall Street lower as investors assess Fed's hawkish stance

23 September, 2017, 01:19 | Author: Regina Lloyd
  • Federal Reserve policymakers led by Fed Chair Janet Yellen will review interest rates at their two-day meeting starting Tuesday. They’re expected to hold rates steady

The Federal Open Market Committee (FOMC) held its sixth meeting on Wednesday to discuss monetary policy and the potential of an interest rate hike, which is expected to happen at least once before the close of 2017.

".My colleagues and I on the Federal Open Market Committee chose to maintain the target range for the federal funds rate at one to one-point-25 percent".

The US Federal Reserve moved to dismantle a pillar of crisis-era support for the world's biggest economy and stuck with its forecast to raise interest rates again this year, saying hurricane damage won't derail an otherwise healthy expansion.

Following the announcement, two-year and 10-year Treasury yields rose 5bps and 4bps to 1.44% and 2.27% respectively, while the dollar gained by 1% against a broad basket of currencies.

However, inflation continues to remain below 2 percent, despite increases in food and energy prices, which the Fed excludes from its calculations.

It maintained its guidance that one further interest rate hike was likely this year despite inflation coming in weaker than expected - adding timid price growth was being "closely" watched. Besides, the Fed hinted that one more interest rate hike may be introduced before the end of the year.

After the announcement, Investors and analysts sensed a greater chance of a rate rise, with federal-funds futures late Wednesday pointing to a roughly 68% chance of a rate increase by December, according to data from CME Group, compared with about 49% a week ago.

The decision comes as the United States central bank sees economic activity "rising moderately," with a labor market that "continued to strengthen" creating "solid" job gains since the Fed's last meeting in July. Wednesday's move to unwind its massive bond holdings is yet another sign of the Fed's confidence in the economy.

Several Fed officials have signaled the central bank could take a first step in selling off its bonds and other investments starting next month.

Investors were also absorbing the Fed's decision to start ending monetary stimulus by reducing its approximately $4.2 trillion in holdings of U.S. Treasury bonds and mortgage-backed securities - acquired in the years after the 2008 financial crisis - from October. And low inflation can hurt the economy: Businesses get queasy about investing in people and equipment.

USA central bankers are counting on steady growth and low unemployment to raise inflation closer to their goal, which would support their policy of gradual tightening through interest-rate increases and a reversal of quantitative easing.

The decision to start selling was widely expected. That neutral rate dropped to 2.9 per cent in the new forecast, down from three per cent in the bank's June forecast.

Aside from the hurricanes, the US economic momentum has been picking up. (Equities generally rise when they expect stimulus and accommodation from central banks, so removing stimulus measures can naturally be anticipated to have the opposite effect.) Wall St opened as much as 0.4% in negative territory on Thursday morning.



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