The End of US Quantitative Easing

The Federal Reserve has been praised as careful and cautious by industry experts after it left the Fed Funds Rate unchanged at 1.00-1.25 per cent, and announced it would begin to reverse its crisis-era stimulus programme from next month. "Storm-related disruptions and rebuilding will affect economic activity in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term".

The announcement marks a milestone in the long recovery from 2008, and reflects confidence by Fed officials that the economy will continue to grow.

Fed officials are predicting economic growth of 2.4% in 2017, a stronger expansion than they anticipated in June.

The Fed is not just split between "doves" who want to keep conditions "easy" and hawks who think they are too easy and interest rates need to be higher - there is also a difference in opinion on what constitutes the appropriate "medicine" for the economy at its current juncture.

The dollar's gains come after a run of losses in recent months as tepid inflation and a lack of movement on Donald Trump's economic agenda in Congress had seen investors bet on no more rate hikes this year.

Fed Chair Janet Yellen said in a press conference after the meeting that a fall in inflation this year remained a mystery and said the USA central bank was ready to change the rate outlook if needed.

In July, the core personal consumption expenditure (PCE) index, Fed's favor inflation indicator, rose only 1.4 percent year on year, below Fed's two percent target and also lower than the 1.9 percent in January.




YDSTIE: A Fed research paper found quantitative easing lowered long-term interest rates by a full percentage point.

The withdrawal of QE will mean that the supply of bonds will go up over time, other things remaining the same, which should increase U.S. bond yields. Market odds for a December rate hike has increased to 60 percent probability (from 50 percent earlier). As a result, financial markets have seemed unsure about whether the Fed would raise rates again before year's end. After that, the monthly reductions will remain steady.

Inflation data remains pivotal for the Fed policy framework but is expected to rise only gradually.

This morning the Federal Reserve delivered on its promise to reduce its $4.5 trillion portfolio by allowing $10B in bonds to mature in October, without replacing them.

Interest rates have stayed low despite a shallow unemployment rate of 4.4 percent in August and inflation down to 1.4 percent. However, it will take years for the Fed to reach the level it sees as appropriate for the size of its balance sheet.

The yield on the U.S. 10-year was at 2.2192% from 2.2298%.

There is also concern that rates could climb faster if other central banks follow the Fed's lead and begin reducing their own bond holdings. The Fed views the job market as strengthening, but it notes that inflation is running below its 2 percent annual target. But the United States dollar was more focused on the historic end to QE, and the beginning of a "normalisation" of the Fed balance sheet and rose close to 1%. Ms. Yellen told reporters that "because the neutral rate now appears to be quite low by historical standards, the federal-funds rate would not have to rise much further to get to a neutral policy stance".

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