Fed holds rates steady, but sees portfolio cuts ‘soon’

THE US FEDERAL Reserve kept interest rates unchanged yesterday and said it expected to start winding down its massive holdings of bonds “relatively soon” in a sign of confidence in the US economy.

The US central bank kept its benchmark lending rate in a target range of 1 percent to 1.25 percent and said it was continuing the slow path of monetary tightening that has lifted rates by a percentage point since 2015.

In a statement following a two-day policy meeting, the Fed’s rate-setting committee indicated the economy was growing moderately and job gains had been solid.

It also noted that both overall inflation and a measure of underlying price gains had declined – trends which have worried some policymakers – but that it expected the economy to continue strengthening.

“The committee expects to begin implementing its balance sheet normalisation programme relatively soon,” the Fed said, adding that it would follow a plan outlined in June.

US stock prices rose following the decision while yields on US government debt fell. The dollar fell against a basket of currencies.

After pushing rates nearly to zero to fight the 2007-2009 financial crisis and recession, the Fed pumped more than $3 trillion (R39trln) into the economy in a bond-buying spree to further reduce rates. Its balance sheet has grown to $4.5trln. The statement cemented expectations the Fed would announce at its next policy meeting in September the start of its balance sheet reduction plan, marking the end of a controversial tool that drew criticism from Republican legislators in Congress.

“The Fed all but told the market the balance sheet runoff will start in September,” said Brian Jacobsen, an investment strategist at Wells Fargo Funds Management in Menomonee Falls, Wisconsin.