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US Fed to reduce holdings

July 26, 2017

The US central bank has signaled it's ready to start selling more than a trillion dollars worth of assets it accumulated in the wake of the financial crisis, suggesting the US economy can do without further stimulus.

USA Symbolbild Zinswende
Image: picture-alliance/dpa/A. Burgi

As expected by analysts, the US Federal Reserve rate-setting Federal Open Market Committee (FOMC) kept its benchmark interest rate unchanged on Wednesday, but said it was ready to unwind the size of its bloated balance sheet as long as the economy stayed on track.

"The Committee expects to begin implementing its balance sheet normalization program relatively soon, provided that the economy evolves broadly as anticipated," the FOMC said in a statement.

The Fed has bought up trillions of dollars of US government bonds and mortgage-backed securities in the past decade since the financial crisis, under efforts to shore up the US economy. As a result, it has inflated its balance sheet to a staggering $4.5 trillion (3.8 trillion euros).

With US growth accelerating and unemployment hovering at just 4.4 percent, the central bank is now considering gradually reducing that stimulus in a manner that avoids roiling financial markets.

Inflation riddle

However, in the absence of any signs of inflation pressure, the FOMC decided to hold off on raising the key lending rate as a further sign of the US economy improving.

Despite nearly seven years of uninterrupted job creation, inflationary pressures and wage gains have shown little sign of life, something that has baffled economists.

The FOMC repeated it was "monitoring inflation developments closely" – barely changing its statement issued in June, when the central bank raised interest rates by a quarter point to the current range of 1.0 to 1.25 percent.

And while inflation is expected to remain below the central bank's two percent target in the coming months, the statement repeated the view that it is expected to "stabilize around the Committee's two percent objective over the medium term."

But analysts in recent weeks have become increasingly doubtful the Fed will decide to go ahead with a third increase in the benchmark lending rate this year, although a slight majority still sees another hike in December.

uhe/kd (Reuters, dpa, AFP)

 

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