December 16 2017

USA dollar declines as Fed meeting begins

December 16 2017, 04:51 | Clarence Walton

USA dollar declines as Fed meeting begins

Asian shares waver as investors await Fed meeting for rate clues

The reduction in assets marks another move to bring the financial crisis measures to an end. It bought the bonds to try to hold down mortgage and other loan rates and support a fragile economy. They also signaled that they were edging closer to gradually shrinking the Fed's bond holdings.

"This kind of resiliency has allowed the market to absorb negative headlines time and again", Frank Cappelleri, senior equity trader at Instinet in NY, told Bloomberg.

Many economists believe the Fed will leave target interest rates unchanged at its next meeting. They expect Fed officials would leave the door open for a rate increase at their December 12-13 meeting. The initial cut in reinvestment will be $10 billion per month, probably beginning in October. At this rate, the Fed's balance sheet would still be above $3 trillion by late 2019.

The Federal Reserve is leaving interest rates alone to give the economy room to keep growing.

In 2008, the Fed's balance sheet was roughly $900 billion.

The major indexes have been breaking new highs, with the Dow recording its best weekly gains this year and the S&P, its second best. If the Fed is bearish then long liquidation could begin.

USA stocks have been breaching record levels, with the Dow clocking a closing record for the fifth day in a row on Monday and the S&P closing at a record for the second consecutive session.

Meanwhile, other central banks, including in the economically resurgent euro zone, may begin tightening policy, leading to more restrictive financial conditions globally. The sector has risen in eight of the last nine sessions and has clocked a 6.7 percent gain in that time as investors anticipated the Fed meeting.

"Clearly the Fed still believes that lower unemployment will eventually translate into a pick-up in inflation, but if inflation continues to undershoot it is hard to see the Fed following through on a hike", he said.

But with the Fed due to unveil its policy decision and economic forecasts at 1800 GMT, caution prevailed.

Yellen earlier this year blamed temporary factors, such as the introduction of cheaper mobile phone plans, for the persistence of undesirably low inflation.

"If I'd be watching anything, it would be primarily with regard to their plans to raise rates in December, which now the market has a 50-50 odds on", said Randy Frederick, vice president of trading and derivatives for Charles Schwab in Austin, Texas.

Pay attention to what Fed policymakers have to say about hurricanes Harvey and Irma and whether the economic fallout could slow the pace of interest rate hikes. The June "dot plot" had pointed to three rate increases for 2017.

"In the short run financials will benefit", said Chad Morganlander, portfolio manager at Washington Crossing Advisors, if the Fed action pushes long-term rates higher relative to short-term rates. Her first term ends in February.

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