Right side of balance sheet

The U.S. central bank kept its benchmark interest rate unchanged between 1% to 1.25%, but said it would begin its historic unwind of a more than $4 trillion balance sheet in October, as expected, solidifying a recent bond selloff, driving yields higher in recent days.

The U.S. 2-year Treasury yield hit a high of 1.430 percent, its highest level since July 6.

The dollar index rose 0.75 percent, with the euro down 0.83 percent to $1.1892. Surveys of economists show they do not expect the Fed to raise interest rates at this time.

The Fed highlighted the devastation caused by Hurricanes Harvey, Irma and Maria, which it said are "inflicting severe hardship" on many communities, but said the impact on the United States economy is likely to be felt only in the near term.

"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", according to the Federal Open Market Committee (FOMC) statement on September 20.

A streak of muted inflation readings had made many skeptical of how quickly the Fed would be able to raise rates, although some investors revised their bets last week after data showed an unexpected acceleration in USA consumer prices. As a result, financial markets have seemed unsure about whether the Fed would raise rates again before year's end. "Beyond December, policy is even more uncertain as we wait to see who Trump appoints to the Fed".

The gold price and interest rates / bond yields usually move in the opposite direction as gold produces no income and investors have to rely on price appreciation to book returns.

In November 2008, in the midst of the financial crisis, former Fed Vice Chair Alan Blinder says, the central bank had already exhausted its main tool to fight recessions.

Three rounds of QE from 2008 saw the Fed buy up US Treasury bonds and mortgage-backed securities in the hope that the sellers - mostly banks - would use the proceeds to bolster the US economic recovery.

Inflation has remained below the 2% target, a concern for Yellen and the central bank, and Sweet also projects the Fed could lower its growth forecast for core personal consumption expenditures - the Fed's key inflation gauge - during Wednesday's meeting. And low inflation can hurt the economy: Businesses get queasy about investing in people and equipment. Markets expect the Fed move to coincide with revisions of its economic projections.

Yellen said in June that the Fed wanted to "to reduce our balance sheet in a gradual and predictable way" and that, hopefully, the process "will just run quietly in the background over a number of years".

"There are many structural drivers holding down inflation around the world and we see a benign inflation outlook across Asia".

The Fed has raised the federal funds rate four times since December 2015, when rates sat near zero for several years following the financial crisis.

  • Wendy Palmer