Fed to modestly reduce bond holdings
The Federal Reserve will begin shrinking the enormous portfolio of bonds that it amassed after the 2008 financial crisis to try to sustain a frail economy. The move reflects a strengthened economy and could mean higher rates on mortgages and other loans over time.
The Fed announced Wednesday that it will let a small portion of its US$4.5 trillion balance sheet mature without being replaced, starting in October with reductions of US$10 billion a month and gradually rising over the next year to US$50 billion a month.
The central bank left its key short-term rate unchanged but hinted at one more hike this year — most likely in December. The Fed policy-makers’ updated economic forecasts show an expectation for three more rate increases in 2018.
The Fed’s policy-making committee approved its action on a 9-0 vote after ending its latest meeting.
Stocks turned lower after the announcement before finishing mixed. Bond yields rose, reflecting expectations of higher rates.
John Silvia, chief economist at Wells Fargo, said some investors appeared surprised that the Fed still expects to raise rates by December. With hurricanes Harvey and Irma clouding some economic data — temporarily raising gas prices, likely restraining hiring and potentially depressing growth in the July-September quarter — some analysts assumed the Fed wouldn’t have enough data by December to assess whether the economy had rebounded from the storms.
Chair Janet Yellen said the Fed’s two rate hikes this year and its decision to begin reducing its bond holdings were signs of a solid economy and job market. Yellen also said the Fed still believes that persistently low inflation — below the Fed’s two per cent target rate for four years — is temporary. To avoid spooking investors, the Fed’s plan for shrinking its balance sheet is so gradual that the total would stay above US$3 trillion until late 2019. Some economists think the figure could end up around US$2.5 trillion, still far above the US$900 billion the Fed held in its portfolio in pre-crisis days.