· The U.S. Federal Reserve left interest rates unchanged on Wednesday but signaled it still expects one more increase by the end of the year despite a recent bout of low inflation.
The Fed, as expected, also said it would begin in October to reduce 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.
The limit on reinvestment is scheduled to increase by $10 billion every three months to a maximum of $50 billion per month until the central bank’s overall balance sheet falls by perhaps $1 trillion or more in the coming years.
New economic projections released after the Fed’s two-day policy meeting showed 11 of 16 officials see the “appropriate” level for the federal funds rate, the central bank’s benchmark interest rate, to be in a range between 1.25 percent and 1.50 percent by the end of 2017, or 0.25 percentage points above the current level.
· U.S. bond yields rose, pushing up the U.S. dollar after the Fed’s decision, but U.S. benchmark stock indexes were little changed. U.S. benchmark 10-year Treasury note yields rose as far as 2.29 percent, the highest since Aug. 8., a move which helped push bank stock prices higher also.
The dollar index, which tracks the greenback against six major currencies, was modestly lower before turning higher on the Fed’s forecast for one more rate hike in 2017. It was up 0.7 percent for its biggest one-day increase since Aug. 4 at 92.426.
The euro EUR= slid 0.8 percent to $1.1894, its lowest in four sessions, while the greenback gained 0.5 percent to 112.17 yen JPY= after touching a two-month high at 112.51 yen, Reuters data showed.
· Fed Chair Janet Yellen said in a press conference after the end of the meeting that the fall in inflation this year remained a mystery, adding that the central bank was ready to change the interest rate outlook if needed.
The Fed noted that the recent hurricanes in the United States would affect economic activity but are “unlikely to materially alter the course of the national economy over the medium term.”
· Fed Projections forecasts only two increases in 2019 and one in 2020. It also lowered again its estimated long-term “neutral” interest rate from 3.0 percent to 2.75 percent, reflecting concerns about overall economic vitality.
Forecasts for economic growth and unemployment into 2018 and beyond were largely unchanged. Gross domestic product is now expected to grow at a rate of 2.4 percent this year, 2.1 percent next year and 2.0 percent in 2019.
The unemployment rate is forecast to remain at 4.3 percent this year before falling to 4.1 percent next year and remaining there in 2019.
Inflation is expected to remain under the Fed’s 2 percent target through 2018 before hitting it in 2019.
· “The Fed took another step on its path of beautiful 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.
In its policy statement, the Fed cited low unemployment, growth in business investment, and an economic expansion that has been moderate but durable this year as justifying it’s decision. It added that the near-term risks to the economic outlook remained “roughly balanced” but said it was “closely” watching inflation.
· “The US Federal Reserve has firmly signaled that a December rate rise is still on the table,” said Luke Bartholomew, of Aberdeen Standard Investments Investment Strategist in London.
”Clearly the Fed still believes that lower unemployment will eventually translate into a pick-up in inflation, but if inflation continues to undershoot it is hard to see the Fed following through on a hike,” he said.
· The U.S. Federal Reserve will resume rate hikes in December and raise borrowing costs three more times in2018, a Reuters poll found on Wednesday.
· After the statement traders were betting on a roughly 67 percent chance of a December hike, compared with 51 percent minutes before, according to the CME Group’s FedWatch tool.
· Senate Republicans announced plans to vote next week on their latest bid to scuttle Obamacare even as a popular comedian who has become part of the U.S. healthcare debate denounced the bill and former President Barack Obama on Wednesday warned of “real human suffering.”
· U.S. home resales fell to their lowest in a year in August as Hurricane Harvey depressed activity in Houston and a persistent shortage of properties on the market sidelined buyers.
The third straightly monthly decline in sales reported by the National Association of Realtors on Wednesday came on the heels of data on Tuesday showing a drop in homebuilding activity in August. The reports suggest housing will probably weigh on economic growth again in the third quarter.
Existing home sales decreased 1.7 percent to a seasonally
adjusted annual rate of 5.35 million units last month. That was the lowest level since August 2016. The NAR said Harvey, which struck Texas in the last week of August, had resulted in sales in the Houston area falling 25 percent on a year-on-year basis.
· Oil prices settled up 2 percent on Wednesday despite a rise in U.S. crude inventories, with the market heading for its largest third-quarter gain in 13 years after the Iraqi oil minister said OPEC and its partners were considering extending or deepening output cuts.
Brent crude futures rose $1.06, or 1.9 percent, to $56.20 a barrel, while U.S. West Texas Intermediate (WTI) crude futures gained 93 cents, or 1.9 percent, to $50.41.
Crude prices were on course for a nearly 16 percent rise this quarter, which would make this year’s performance the strongest for the third quarter since 2004.
Reference: Reuters
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