Fed to wind down stimulus from October
> US central bank maintains interest rates but signals one more hike likely by year-end
WASHINGTON: The US Federal Reserve (Fed) left interest rates unchanged on Wednesday but signalled 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 about US$4.2 trillion (RM17.6 trillion) in holdings of US Treasury bonds and mortgage-backed securities acquired in the years after the 2008 financial crisis.
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% and 1.50% by the end of 2017, or 0.25 percentage points above the current level.
US bond yields rose, pushing up the dollar after the Fed’s decision, but US benchmark stock indices were little changed.
“The Fed took another step on its path of beautiful normalisation, 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.
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.
“What we need to figure out is whether the factors that have lowered inflation are likely to prove persistent,” she said. If they do, “it would require an alteration of monetary policy,” she said.
While the interest rate outlook for next year remained largely unchanged in the Fed’s latest projections, with three rises envisioned in 2018, the US central bank did slow the pace of anticipated monetary tightening expected thereafter.
It forecasts only two increases in 2019 and one in 2020. It also lowered again its estimated long-term “neutral” interest rate from 3.0% to 2.75%, reflecting concerns about overall economic vitality.
“The US Federal Reserve has firmly signalled that a December rate rise is still on the table,” said Luke Bartholomew, of Aberdeen Standard Investments investment strategist in London. – Reuters