Fed Stands Pat on Rates, to Wind Down Stimulus "Soon"

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Fed Stands Pat on Rates, to Wind Down Stimulus

After raising interest rates at their last meeting, expect a very quiet statement from Janet Yellen and the rest of the Federal Reserve at their policy meeting this week.

Head of trading in Asia-Pacific Stephen Innes said that there may also be the possibility that the bank will start trimming its balance sheet in September.

The central bank plans to start scaling back its $4.5 trillion portfolio of bonds it accumulated while trying to boost the economy after the Great Recession in 2008.

Investors seized on those inflation comments as a sign that the Fed is unlikely to rush into another rate rise too soon, snapping up bonds and stocks.

The Fed's attitude towards inflation was a blow to the U.S. dollar as it makes a third rate hike taking place later in the year more unlikely, especially following comments from Yellen earlier in the month as she expressed doubts that the slowdown in inflation was due to temporary factors. Fed officials have said they will take care to reduce these assets in a gradual way that will not disrupt markets.

The Fed's policy statement Wednesday was approved 9-0.

"What the Fed says tomorrow is the million dollar question. but the risk is that they sound a bit more cautious after the fourth consecutive downside surprise in inflation".

Despite almost seven years of uninterrupted job creation, inflationary pressures and wage gains have shown little sign of life, something that has baffled economists.

While keeping interest rates unchanged, the Federal Reserve on Wednesday said it would begin to unwind its bloated balance sheet "relatively soon". "That will have a far greater impact going forward than one or two rate hikes". The agency also described its plans for reducing its bond holdings, a process that analysts expect to begin at the Fed's next meeting. In a move largely expected in financial markets, the policymaking Federal Open Market Committee (FOMC) agreed to keep its benchmark rate target at 1-1.25%. "I don't think it would temper the positive mood (on markets) but we have to look at it". Her remarks lifted financial markets as investors interpreted her words to suggest that the Fed might slow its pace of rate increases.

The Dow Jones Industrial Average rose 97.07 points, or 0.45 percent, to 21,710.5, the S&P 500 gained 1.92 points, or 0.08pc, to 2,479.05 and the Nasdaq Composite added 7.11 points, or 0.11 percent, to 6,419.29. A lot can change in half a year as it was once thought monetary policy might need to be more aggressive should fiscal stimulus be added to an economy firing on almost all cylinders.

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