US Federal Reserve to start unwinding $4.2tn stimulus from October

The current expansion is now in its ninth year, one of the longest periods of growth in USA history.

Alongside pulling the trigger on the unwinding of quantitative easing, the Fed kept interest rates on hold, but the tone of its announcement prompted investors to price in a higher likelihood of a December rate rise.

The Fed will also release new economic forecasts, and could also talk about the impact which the hurricane season will have on U.S. growth. But they said the storms would not "materially alter" the country's economy overall.

The Fed still forecasts three interest rate increases in 2018, two in 2019, and one in 2020, and set the estimated long-term rate at a range between 2.75 and 3 percent.

In a statement released by the Federal Reserve, they pointed towards the strength of job growth and to the increasing in household and business spending. "Confirmation that gradual tightening is likely to continue despite slowing inflation prompted a modest Dollars rally and slight selloff in Treasuries".

YELLEN: The decisions that we've made this year about rates and today about our balance sheet are ones we have taken because we feel the USA economy is performing well.

The official optimism went only so far, however.

Policymakers have been divided in recent months on the near-term threat of inflation, with some arguing the central bank should be patient before raising rates again.

The dollar index, which tracks the greenback against six major currencies, was modestly lower before turning higher on the Fed's forecast for one more rate hike in 2017.

Interest rates have stayed low despite a shallow unemployment rate of 4.4 percent in August and inflation down to 1.4 percent.

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"While a rate hike is negative, the fact that the Fed's confidence in the economy is strong enough to expect a rate hike can be taken as supportive of market sentiment", said Soichiro Monji, chief strategist at Daiwa SB Investments. This time as well the number of officials making prediction is 12 of 16. That helped put more downward pressure on interest rates that supported borrowing and helped boost the economy.

The Fed did lower its projection for its so-called neutral rate.

The resulting market action was a bit of a sell-off for the precious metals, since the Fed decision signals greater confidence in the economy going forward.

But other economic measures paint a contrasting picture of economic health. After that, the monthly reductions will remain steady. The long-run fed funds rate is now expected to be 2.75 percent instead of 3.00 percent. Over time, however, as the Fed picks up the pace, it could cause some rate volatility.

"It's premature to conclude that the underlying inflation trend is falling well short of 2%", Fed chair Janet Yellen said in June. The FOMC also has a two-day meeting slated for October 31 and November 1. The European Central Bank has recently indicated that it will wind down its asset purchases as it responds to firmer growth in the euro area, while the Bank of England has suggested it could lift short-term rates this year in response to rising inflation risks.

Officials also said they plan to start unwinding the at the USA central bank's $4.5 trillion balance sheet next month by reducing its bond holdings, which will gradually increase long-term borrowing rates. To avoid surprising markets or injecting volatility, the Fed plans to gradually reduce its holdings by $10 billion a month.

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 accumulated most of the balance sheet during three rounds of bond buying aimed at keeping mortgage rates low and goosing economic activity.

Still, questions remain, both about how markets react and where the Fed will decide where to stop. QE pumped as much as $85 billion a month into the struggling United States economy and pushed rates to zero.

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