Stocks, dollar firm ahead of Fed decision

People walk past an electronic stock board showing Japan’s Nikkei 225 index at a securities firm in Tokyo Wednesday

People walk past an electronic stock board showing Japan’s Nikkei 225 index at a securities firm in Tokyo Wednesday

However, just hours away from a vote on monetary policy, members of the FOMC are still expected to hike rates Wednesday afternoon.

Officials also revealed plans for winding down their holdings of Treasury and mortgage securities by updating principles laid out in 2014, though they didn't say exactly when the process will commence.

"It won't stop the Fed from hiking interest rates later today, but it increases the downside risks to our forecast that there will be a further two rate hikes in the second half of this year", said Paul Ashworth, chief USA economist at Capital Economics in Toronto.

For mortgage bonds, the Fed will start with $US4 billion per month and raise it in quarterly steps of $US4 billion until it reaches a $US20-billion monthly cap.

Interest rates for 30- and 15-year fixed home loans, as well as 5/1 ARMs, all slipped lower today, according to a NerdWallet survey of mortgage rates published by national lenders Wednesday morning. In fact, the Fed provided an updated policy normalization plan on that front for the first time since September 2014 (a topic for an upcoming blog post).

The statement said: "The committee now expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated". Hawks tend to worry that rates kept too low for too long could escalate inflation or fuel asset bubbles.

Fed officials now expect the US unemployment rate to end the year at 4.3 percent, down from the 4.5 percent they predicted in March. In part, the recent rise in negative-yielding debt is down to exchange rates, with the euro and the yen-which account for a lot of negative-rate bonds-rallying against the dollar.

Fed funds futures on Tuesday suggested traders saw only a 29% chance of rates rising to 1.25%-1.50% at the Fed's Sept 19-20 meeting, and a 57% chance of such a move at its December 12-13 meeting. That's the level the Fed believes is a neutral rate - neither stimulating growth nor restraining it. But analysts will be watching the so-called dot plot of rate forecasts for any downward drift in 2018 and 2019.

Such projections aren't set in stone and reflect how the views of Fed officials have shifted.

"Near term risks to the economic outlook appear roughly balanced, but the committee is monitoring inflation developments closely", the Fed said in a statement. There had been no decision on whether interest rates could be increased at the same time as reducing the balance sheet, although it was a possibility.

Following the outbreak of the crisis in 2007 the federal funds rate swirled downwards from 5.25 percent in August 2007 to 0.25 percent in December 2008, in order to stimulate the markets after the ferocious crash. So, while expectations are for the Fed to raise rates today could this be the last time it raises rates this year? There it stood for 7 meager years while the economy recovered slowly. This is a sign that the Fed is expected to scale back prospects of future rate hikes, it is also a sign that the USA bond market is getting bearish on the outlook for the United States economy.

But inflation has weakened.

Officials' current projections, released in March, are for a rate of 1.375 per cent by the end of this year and 2.125 per cent 12 months later.

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