Fed approves October reversal of historic stimulus, leaves rates unchanged

In a long-anticipated move, the Fed also announced it will slowly shrink its huge $4.5 trillion balance sheet starting in October.

The idea was that, with interest rates cut to close to zero, more needed to be done to boost economic activity. The caution in raising rates comes as inflation has consistently stayed below the Fed target of 2 percent.

That means President Trump will appoint 5 of the 7 total members on the Fed's governing board before the end of his 1st year in office.

The Federal Reserve will begin shrinking the enormous portfolio of bonds it amassed after the 2008 financial crisis to try to sustain a frail economy. The Fed stopped buying new bonds in 2014 but kept its balance sheet high by reinvesting the proceeds of maturing bonds.

But it remains to be seen whether central bankers are more concerned about the temporary slowdown, or will brush it off.

No Fed officials dissented on the decision.

The Fed targets 2% inflation and its preferred indicator, the personal consumption expenditure deflator was just 1.4% in July, although the August consumer price index rose to 1.9%, from the prior month's reading of 1.7%. A decline in estimates of this measure would help Yellen to explain why the steep drop in the jobless rate had failed to spur inflation as expected so far.

"In my view, they need to normalize policy", he said.

Most economists don't expect the Fed to raise interest rates Wednesday.

This scenario could provide a trade opportunity: a window of opportunity to short the dollar between the release of the FOMC statement and the dot-plot at 18:00 and Yellen's presser that begins at 18:30 and usually lasts one hour. The Fed is likely to keep interest rates unaltered post its two-day meeting, while analysts suggest that it could announce plans to begin unwinding its United States dollars 4.5 trillion balance sheet.

"Downgrades to the infamous dot diagram could complicate Yellen's efforts to convince markets they are too complacent", these economists warned.

However, policymakers have maintained expectations for a third hike to happen before the year is out and they are expected to reaffirm this stance.

Deutsche Bank does believe that inflation developments will be key and some further evidence of the inflation trend firming is likely needed.

The CME Group's tracker of investor sentiment has put the likelihood of a rate hike by December at 56 percent.

The impact of the Fed unwinding its purchases of mortgage-backed bonds on the housing market is therefore going to be particularly sensitive if it pushes up interest rates - and therefore the cost of mortgages - for homeowners.

But President Trump is getting a much larger opportunity to influence the Fed with his nominations.

To avoid spooking investors, the process would be so gradual that the Fed's balance sheet would remain above $3 trillion until late 2019.

The Big A: What we know so far; Kevin Warsh is now the obvious frontrunner as President Trump's replacement for Janet Yellen. Janet Yellen's term as US Federal Reserve chair is up in February, and president Trump has waffled on whether he will reappoint her, from insisting she is tainted by her association as an Obama nomination, to suggesting that, as a "low-interest rate person", he approves of her dovishness.

Inflation affects prices - milk, train tickets, everything.

  • Zachary Reyes