Fed expected to leave rates unchanged;
balance sheet in focus
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[July 26, 2017]
By Jason Lange
WASHINGTON (Reuters) - The Federal Reserve
is expected to hold interest rates unchanged on Wednesday and possibly
hint that it will start winding down its massive holdings of bonds as
soon as September in what would be a vote of confidence in the U.S.
economy.
The U.S. central bank will issue its latest rates decision following the
end of a two-day policy meeting at 2 p.m. EDT. Economists expect the
Fed's benchmark lending rate to remain in a target range of 1.00 percent
to 1.25 percent.
That would mark another pause in the monetary tightening campaign that
the Fed began in December 2015. The central bank has raised rates twice
this year, including at its last policy meeting in June.
Wall Street analysts see little chance the Fed will announce the start
of the wind down of its $4.5 trillion balance sheet. However, the Fed's
policy statement may provide more visibility on when that might occur.
Citibank economists said in a note to clients that the Fed's
rate-setting committee was more likely to say that the trimming would
start soon. "(That would) signal that the committee plans to announce
balance sheet reduction in September," they said in the note.
Reducing the balance sheet will unwind one of the Fed's most
controversial tools used to fight the 2007-2009 financial crisis and its
aftermath.
After pushing rates nearly to zero in a bid to boost investment and
hiring, the Fed pumped over $3 trillion into the economy through
purchases of U.S. Treasury securities and government-backed mortgage
debt to further reduce rates. That program drew criticism from
Republican lawmakers in Congress.
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The Federal Reserve Building stands in Washington April 3, 2012.
REUTERS/Joshua Roberts/File Photo
The subsequent economic recovery, marked by strong and steady job
gains, has pushed the U.S. unemployment rate to 4.3 percent, near a
16-year low. Fed policymakers have said labor market strength could
eventually push inflation too high.
The Fed recently signaled it would begin to trim its balance sheet
this year. Yellen said earlier this month that process could begin
relatively soon and economists polled by Reuters expect the
announcement will come in September.
But a slowdown in inflation this year has caused jitters among some
Fed officials who are already concerned that inflation has been
below the central bank's 2 percent target for five years.
The Fed's preferred measure of underlying inflation dropped to 1.4
percent in May. It was 1.8 percent in February.
(Reporting by Jason Lange; Editing by Paul Simao)
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