Fed conflicted by tepid US inflation, global economic rebound

Fed conflicted by tepid US inflation, global economic rebound

The Federal Reserve will hold interest rates at 1.0 to 1.25 percent, while also beginning to sell off a almost $4.5 trillion portfolio of bonds and other assets next month, The Wall Street Journal reports. Sometimes markets pullback after a major event to give investors time to make adjustments and digest the news. "If that happens, then USA rates are likely to rise". The Fed will reduce its balance sheet by ten billion dollars a month initially, gradually upping the pace after each quarter, until it reaches 50 billion dollars every month promising to move cautiously, so as to avoid unsettling the markets.

The Fed also said it will begin to unwind its $4.5 trillion balance sheet in October.

Wall Street came under selling pressure on Wednesday before clawing back most of the losses as investors digested the latest Federal Open Market Committee statement, where the target range on the Fed funds rate was held but projections affirmed expectations for a third 2017 hike. They continued to forecast one more interest-rate hike later this year, saying storm damage will have only a temporary impact on the economy.

The San Francisco Fed president will be a voting member of the central bank's policy committee next year.

Markets across the globe are cautious, as central banks are warning about overpriced assets, excessive borrowing and the need to raise interest rates in their respective economies.

David Page, senior economist for United States and UK at AXA Investment Managers UK, who said: "We did not expect a further reduction in the Fed's assessment of the longer-term rate".

Meanwhile, the Fed also chose to leave interest rate changed this time, as investors widely expected.

Analysts believe the initial impact on the mortgage industry will be small, but as the Fed steps up the reduction, it could create some rate volatility.

Nonetheless, US stocks rebounded quickly after a brief correction triggered by the ending of QE in October 2014. But they still are forecasting another increase of 0.25 of a percentage point by the end of the year - a signal they think the economy is still on solid ground. Depsite downward revision in the core CPI for this year, the staff upgraded the economic growth outlook and downgraded the unemployment rate forecast. At a two-day rate review ending on Thursday, the BOJ is widely expected to maintain its short-term interest rate target at minus 0.1 per cent and the 10-year government bond yield target of around zero per cent. Inflation has remained persistently below that level.

"Looking ahead, it is important to remember that there is potential for a very different Board of Governors next year after Janet Yellen's term expires this coming February", Dye said.