Federal Reserve weans United States off stimulus

The Fed expanded its balance sheet to unheard-of levels during the 2008-2009 financial crisis and its lingering economic aftermath, first to stave off financial and economic collapse, and then to keep the USA economy on what was effectively a monetary respirator until it could return to normal strength. It has also trimmed its inflation forecast.

The Dow Jones Industrial Average rose 41.79 points, or 0.19 percent, to end at 22,412.59, the S&P 500 gained 1.59 points, or 0.06 percent, to 2,508.24 and the Nasdaq Composite dropped 5.28 points, or 0.08 percent, to 6,456.04. Inflation has remained persistently below that level.

In its policy statement, the Fed cited low unemployment, growth in business investment, and an economic expansion that has been moderate but durable this year as justifying it's decision.

USA stock indexes slipped on Thursday as investors braced for a third interest rate hike this year and the United States ordered new sanctions against North Korea.

The policymaking Federal Open Market Committee (FOMC) agreed to keep its benchmark rate target at 1%-1.25%, forecasting at least one more hike this year.

Markets are pricing in a 56 percent probability of the Fed raising rates in December, according to the CME Group's FedWatch tool. More recently, she has wondered whether something more widespread might be keeping inflation low.

Still, any messaging from the Fed that departs from investors' expectations could shake up the markets, traders said. They now expect there will likely be two hikes, down from three.

Meantime, the Fed has managed to conclude plans to shrink its $4.5 trillion portfolio of bonds and other assets without provoking much concern from investors.

And the Fed will not be selling securities, but will simply let the debt mature and roll off its balance sheet. They also announced plans to begin unwinding the Fed's balance sheet next month, which is a process that could achieve similar results to a rate increase. The U.S. central bank intends to spend $10 billion less on bonds beginning next month, a figure that will eventually reach $50 billion a month in October 2018. The Fed views the job market as strengthening, but it notes that inflation is running below its 2 percent annual target.

Stocks had been mostly flat ahead of the Fed statement, while the dollar had been slightly lower.

The Federal Reserve has left its key short-term interest rate alone but has taken a step that could lead to higher long-term rates, such as mortgage rates. Gross domestic product is now expected to grow at a rate of 2.4 percent this year, 2.1 percent next year and 2.0 percent in 2019.

Markets anticipated the balance sheet unwinding and have been quiet so far on Wednesday.

The pan-European STOXX 600 share index dipped less than 0.1 percent.

The jump in the dollar against the yen boosted Japanese exporters, which helped the Nikkei index close 0.1 percent higher.

The Federal Reserve announced Wednesday that it would start slowly reducing the trillions of dollars in bonds it bought to try to stimulate the economy, another milestone in the central bank's efforts to return to a normal monetary policy after the Great Recession.

  • Eleanor Harrison