US Fed announces plan of $4.5 trillion balance sheet reduction

US Fed announces plan of $4.5 trillion balance sheet reduction

And the Fed will not be selling securities, but will simply let the debt mature and roll off its balance sheet. A higher target rate, meanwhile, would push the Fed further from the zero percent lower bound it has been trying to escape after a decade nurturing the US economy into a post-crisis recovery. "In addition, U.S. financials such as banks also stand to benefit from higher rates, as they will see a boost to their lending margins". Still, no one is sure how the financial markets will respond over the long run.

Just as the Fed had never before engaged in a bond-buying spree of such magnitude, it has never attempted to shrink a portfolio that is now roughly five times its size before the financial crisis. The UK 10-year gilt was at 1.2839% from 1.3003%. Since late 2008, the Fed has bought assets to the total combined value of $4.5 trillion. The Fed has given investors months to digest its forthcoming move and has stressed that the paring of its balance sheet will proceed extremely gradually. The risk exists that investors could become spooked by the rising number of bonds being transferred back into private hands. If that were to happen, long-term rates might surge undesirably high, which could weigh on the economy.

Financial markets are largely subdued as investors remain cautious ahead of the Federal Reserve's announcement of its monetary policy meeting.

America's central bank has stuck to script - or nearly - announcing it will begin to taper the size of its balance sheet next month while keeping the target for its main policy interest rate unchanged at between 1.0% and 1.25%.

Furthermore, market-based measures of "inflation compensation" continued to be at low levels, although survey-based readings on longer-term inflation expectations had, on balance, seen little change. Higher prices for gasoline and some other items in the aftermath of the hurricanes will likely boost inflation temporarily; apart from that effect, inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee's 2 percent objective over the medium term.

Bond prices fell. The yield on the 10-year Treasury note rose to 2.28 percent. They will closely watch Fed Chair Janet Yellen's press conference for her views on inflation.

Yellen expected that the low inflation is due to transitory factors that are likely to disappear over the course of the coming year. Inflation has been stubbornly low for years, suggesting the Fed should hold off.

According to Fed officials' projections, the unemployment rate will drop to 4.3 percent by the end of this year, and further fall to 4.1 percent in 2018 and 2019, well below the 4.6 percent where the economy reaches full employment. The June "dot plot" had pointed to three rate increases for 2017.

Yellen said the recent data breach points to the importance for strong cybersecurity controls - and that the Fed and other regulators are focused on ensuring banks have them in place, she noted. One vacancy about to open is the seat of Vice Chairman Stanley Fischer, who is stepping down next month.