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US Fed holds rates steady, expects portfolio cuts 'relatively soon'

28 July, 2017, 00:08 | Author: Paula Vaughn
  • Fed policy meeting in focus this week

With the US economy chugging along for many months, the Fed has been gradually easing off the stimulus it provides to the economy by raising interest rates to more normal levels.

Some investors saw evidence in the Fed's statement that the central bank is a little less likely to raise rates in December.

Markets are expecting USA economic growth to show a significant rise to 2.6 per cent in the second quarter compared to 1.4 per cent in the first quarter, fuelled by solid hiring and an uptick in consumer spending.

Investment bank Goldman Sachs has projected the central bank will ultimately shrink its balance sheet by just $1.1 trillion, or about 25%, a process that would take until late 2020.

"The fact of the matter is that US monetary policy remains on a tightening path as the Fed tries to move towards normalization".

As expected the US Federal Reserve left its key interest rate unchanged, but signalled that it could start shrinking its huge $US4.5 trillion balance sheet from the next meeting in September.

USA stock indexes climbed to fresh records Wednesday after investors found a dovish tilt in the Fed's latest statement and corporate earnings continued to beat Wall Street expectations. Another measure of inflation, the Consumer Price Index, dipped to 1.6% year-over-year in June.

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The FOMC voted to increase the rate twice earlier this year.

Fed watchers anticipated that the inclusion of the term "relatively soon" would signal the Fed could announce the timing of their balance-sheet reduction program at its meeting in September.

Inflation has eased in the last three months, slipping further below the Fed's 2% target, even though job growth has been strong.

The dollar index has fallen about 4 percent over the last month and more than 8.5 percent this year.

Yields on 10-year US Treasuries - which move inverse to price - nudged up fractionally to 2.29% though Europe held most of its gains which had included a six-week low on Germany's short-dated yields.

The US dollar initially rose in the forex markets after the release of the FOMC statement before slipping against its major peers.

Reaction to the Fed's statement triggered a broad selloff in the USA dollar, noted NAB currency strategist Rodrigo Catril, which helped drive interest in the Australian dollar and similar commodity-linked currencies. "I don't think the next one is gonna be coming from the United States", said David Levy, an economist at Jerome Levy Forecasting Centre. Germany's DAX slipped 0.3 percent to 12,273.37.

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