Dollar shines, Asia shares slip after Fed signals December rate hike

Dianna Christensen
September 23, 2017

One thing not expected Wednesday is any change in the Fed's key policy rate, which remains in a low range of 1 percent to 1.25 percent.

FOMC mentioned that 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 drift downward reflects a lowering in officials' view of the so-called neutral rate, an underlying interest rate that is consistent with the economy operating at its full potential and expanding without overheating.

However, Fed's 12 month inflation projection is expected to remain below 2 percent.

"While the median 2017 dot is still set to tentatively pencil in a December rate hike, we expect to see more members calling for a pause for the remainder of the year", says Patel.

The Federal Reserve has four meetings left before Yellen's term ends in February, 2018, It has already put interest rates up twice in 2017 and the general mood is it will not happen again this year.

Weak inflation data in the U.S. has prompted investors to dial back their bets on future rate hikes, but the market may be underestimating the Federal Reserve, according to Nick Gartside, worldwide chief investment officer of fixed income at JP Morgan Asset Management.

Sure, bond traders rushed to price in a rate hike by year-end, with the implied probability climbing to about 60 percent, from below 25 percent on September 8.

"It doesn't get any more brazenly hawkish from Dr Yellen, who along with the majority of her colleagues are clearly in the December rate hike camp and the markets are reacting to this news", said Stephen Innes, head of Asia-Pacific trading at OANDA.

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Still, the Fed said in a statement that prices for gasoline and other items might temporarily spike because of the damage caused by Hurricanes Harvey, Irma and Maria.

Yellen earlier this year blamed temporary factors, such as the introduction of cheaper mobile phone plans, for the persistence of undesirably low inflation. This includes a job market still healing from the Great Recession, lower energy prices and a strong dollar that reduced the costs of imports. The unemployment rate is just 4.4 percent, near a 16-year low.

The central bank also announced it would next month begin cutting back on its holdings of bonds and other assets built up as part of a scheme to keep rates low and steer the economy through the global financial crisis a decade ago.

The U.S. Federal Reserve will reduce its bond holdings evenly across the maturities of Treasury bonds and, on mortgage bonds, it will continue to focus reinvestments on 15- and 30-year securities.

The move to unwind the portfolio the Fed acquired during its crisis-era bond-buying programmes was widely anticipated.

Yellen will also assess the health of the economy, a key indicator that could predict whether the Fed will stay on track with future policy projections.

While the decision to shrink the Fed's balance sheet is much expected, when and how the Fed will manipulate its target for short-term interest rates is less clear. 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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