US Federal Reserve: Rates stay on hold but stimulus initiatives to be reduced "relatively soon"

 
Oliver Gill
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Fed Chair Janet Yellen Testifies At Senate Hearing On Semiannual Monetary Policy Report To Congress
US Fed chair Jane Yellen has previously outlined plans for "balance sheet normalisation" (Source: Getty)

The US Fed today revealed it is edging closer towards kicking off the wind down its mammoth economic stimulus programme.

The Federal Open Market Committee (FOMC) confirmed expectations that interest rates would be unchanged – a decision that was unanimously supported by the rate-setting committee following its two-day meeting.

The benchmark interest rate will be kept in a target range of between one to 1.25 per cent.

US stocks were not dramatically swayed by the Fed's statement after notching up all-time highs earlier in the day.

"They didn’t give the market any new information really to trade," said BMO Capital Markets interest rate strategist Aaron Kohli.

'Solid'

The Fed said job growth had been "solid" since the start of the year, with household spending and business investment expanding. Inflation is running at below its two per cent target on a 12-month basis.

The central bank has previously signposted plans to unwind its haul of bonds, which it has held to provide economic stimulus. Reducing its stimulus measures are known as a "normalisation programme".

Read more: Fed chair Yellen expects no more financial crises 'in our lifetime'

The Fed said:

The committee expects to begin implementing its balance sheet normalisation programme relatively soon, provided that the economy evolves broadly as anticipated.

Kully Samra, UK managing director of Charles Schwab, said: “The [rates] decision was widely expected, as they have indicated their desire to go slow and the economy has shown few signs of getting overheated."

QE

The Fed is keen to reduce the $4.5 trillion of bonds sat on its balance sheet, according to ING chief international economist James Knightly.

"This statement suggests it will begin 'relatively soon', whereas previously they had merely said it will begin “this year”. We look for the September FOMC meeting to formally say that balance sheet reduction will start in October.

Assuming we are correct right, our debt strategists estimate that only $197bn of the $425bn in maturing treasuries in 2018 would still be reinvested.

Earlier today US single-family home sales figures hit near 10-year highs.

The commerce department said on Wednesday new home sales rose 0.8 per cent to a seasonally adjusted annual rate of 610,000 units last month. The sales pace for March, April and May was revised lower.

Read more: Fed signals it is close to rate hike

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