As expected the US Federal Reserve left its key interest rate unchanged, but signalled that it could start shrinking its huge $US4.5 trillion balance sheet from the next meeting in September.
The Fed kept its federal funds rate unchanged at 1% to 1.25% at the meeting, as expected by financial markets and said in its post meeting statement that it was ready to start paring back the size of its balance sheet “relatively soon” as long as the economy stays on track.
US sharemarkets rose to new to new highs as gold and oil also ended the day higher.
The local market is looking at a small rise when trading resumes this morning. Investors will have news that iron ore prices recovered the $US70 a tonne level in northern China, which should boost the big miners.
The main US market indexes were already trading higher before the Fed statement was released, thanks to upbeat earnings results from the likes of Boeing and Caterpillar.
The S&P 500 closed a fraction of a point higher at 2,477.83. The Dow added 97.58 points, or 0.5%, to 21,711.01. The Nasdaq Composite rose 10.57 points, or 0.2%, to 6,422.75.
The Aussie dollar was once again closing in on 80 US cents in US trading this morning, despite the firm statement from RBA Governor, Phil Lowe on Wednesday that the central bank would not change monetary policy just because rates were changing off shore.
In May the Fed said it would begin to wind down its balance sheet later “this year.” Analysts said the latest statement points to the central bank either announcing or launching the effort by September.
The central bank will slowly trim its collection of bonds over the next few years, though the Fed said it’s unlikely to restore its balance sheet to pre-recession levels of around $US800 billion.
In its post-meeting statement the Fed did offer a note of caution on inflation, saying inflation was “running below 2%” instead of “running somewhat below 2%,” as it did in the June statement.
The Fed’s preferred inflation gauge, the PCE index, has tapered off to 1.4% growth over 12 months from a five-year high of 2.1%. This measure for June will be updated tomorrow.
The central bank thinks the economy is strong enough to get by on its own after eight years of expansion, but senior officials want to see the annual pace of inflation return to 2%.
The Fed has already raised the cost of borrowing twice in 2017 and the market reckons there will be a third before the end of the year, most likely in December.
The bank aims to sell off its balance sheet piecemeal in an effort to avoid any surprises that roil Wall Street and potentially harms growth. That’s what happened in 2013 during the so-called “taper tantrum.”
So far the approach seems to have worked. The Dow has climbed 9% in 2017 despite the Fed rate rises.
