The policy statement and corresponding projections revealed the Fed still in the midst of a balancing act between an economic recovery which has kept U.S. unemployment low and is gaining steam worldwide and a current worrying drop in U.S. inflation.
The Fed noted that the recent hurricanes in the United States would impact economic activity but are “unlikely to materially alter the course of the national economy over the medium term.”
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 prepared to change the interest rate outlook if needed.
The Fed, as expected, also said it would start in October to reduce its approximately $4.2 trillion in holdings of U.S. Treasury bonds and mortgage-backed securities by originally cutting up to $10 billion each month from the amount of maturing securities it reinvests.
It forecasts just two increases in one and 2019 .
Yellen said it would require a “a material deterioration” in the market’s performance for the Fed to reverse a schedule which she expects to proceed “gradually and predictably.”
(For a picture on the legacy of the QE era, click here)
Forecasts for growth and unemployment into beyond and 2018 were unchanged. Gross domestic product is now expected to rise at a rate of 2.4 percent this year, 2.1 percent next year and 2.0 percent in 2019.
“Clearly the Fed still considers that reduced unemployment will eventually translate into a pick-up in inflation, but if inflation continues to undershoot it’s difficult to see the Fed following through on a hike,” he said.
New economic projections released after the Fed’s two-day policy meeting revealed 11 of 16 officials see the “appropriate” level for the federal funds rate, the central bank’s benchmark interest rate, to maintain a range between 1.25 percent and 1.50 percent by the end of 2017, or 0.25 percentage points above the current level.
That action will start a gradual reversal of the three rounds of bond buying, or easing, the Fed pursued between 2008 and 2014 to stimulate economic growth after recession and the crisis.
“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 In Allianz, in California.
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.
There were no dissents in the Fed’s policy decision.
Reporting by Howard Schneider and Ann Saphir; Editing by Paul Simao and David Chance
The Fed, as expected, also said it would start in October to reduce its approximately $4.2 trillion in holdings of U.S. Treasury bonds and mortgage-backed securities obtained in the years after the 2008 fiscal crisis.
As justifying the decision of it, and an economic expansion that has been moderate but lasting this year growth in business investment. It added the risks to the economic outlook remained “roughly balanced” but said it was “tightly” seeing inflation.
While the interest rate outlook for next year remained mostly unchanged in the Fed’s latest projections, with three climbs envisioned in 2018, the U.S. central bank did slow the pace of expected monetary tightening expected thereafter.
“What we will need to figure out is whether the factors which have lowered inflation will probably prove persistent,” she said. If they do, “it would require an alteration of monetary policy,” Yellen said.
U.S. benchmark 10-year Treasury note yields rose up to 2.29 percent, the highest since Aug. 8., a move which helped push bank stock prices higher also.
The limit on reinvestment is scheduled to rise every three months until the central bank balance sheet drops by perhaps $1 trillion or more in the coming years.
Three of the hawkish policymakers seemed to move their policy rate down to account for just one increase leaving 11 to a heart. This year the Fed has raised rates twice.
In its policy statement, the Fed cited unemployment,
FED BOND PORTFOLIO TO SHRINK FROM OCTOBER
“The US Federal Reserve has firmly signaled that a December rate increase remains on the table,” said Luke Bartholomew, of Aberdeen Standard Investments Investment Strategist in London.
Inflation is expected to remain under the Fed’s 2 percent target before hitting it.