The Federal Reserve left its benchmark interest rate unchanged and said Wednesday that it would begin to withdraw some of the trillions of dollars that it invested in the USA economy after the 2008 financial crisis.
The Dollar/Yen surged on Wednesday, hitting its highest level since July 18 after the U.S. Federal Reserve signaled it may raise interest rates for a third time this year even as inflation has remained below its 2-percent goal. Over the years, it has worked well enough to help cut the unemployment rate to its current low of 4.4 percent.
"In determining the timing and size of future adjustments to the target range for the federal funds rate, the committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation", the Fed said.
John Silvia, chief economist at Wells Fargo, said some investors appeared surprised that the Fed still expects to raise rates by December.
Another rate hike is unlikely this time around as the disruptions caused by Hurricanes Harvey and Irma have distorted the overall picture of the United States economy (witness the spike in initial jobless claims in what has been an otherwise uninterrupted downtrend).
Global oil prices slip, but remain near recent highs
Still, "refinery runs rebounded a solid 1.2 million barrels per day, in whole part due to returning refining activity on the U.S. Conversely, due to demand, Nolting says prices won't fall dramatically either: "So I think it's quite stable in the oil sector".
With regard to the latter, it observed short-term disruption but stated that past experience suggested "that the storms are unlikely to materially alter the course of the national economy over the medium term". Higher prices for gasoline and some other items "in the aftermath of the hurricanes will likely boost inflation temporarily", the Fed said.
As a outcome, we continue to expect two 0.25% Fed funds rate hikes until the end of 2018, namely one in December of this year and one next June.
It forecasts only two increases in interest rates in 2019 and one in 2020.
The Fed's move to reduce its balance sheet is a sea-changing event for the mortgage industry, according to analysts.
In November 2008, in the midst of the financial crisis, former Fed Vice Chair Alan Blinder says, the central bank had already exhausted its main tool to fight recessions.
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As widely expected, the Fed said it would begin in October to trim its massive holding of U.S. Treasury bonds and mortgage-backed securities acquired in the years after the 2008 financial crisis.
Treasury prices fell and the dollar rose as investors weighed the Fed's plans to press ahead with gradual policy tightening.
Still, officials seem to be prepping markets for the possibility of a rate increase. Instead, the USA central bank chose to look past low inflation and said the harm of the Hurricanes would have no lasting economic impact. The Federal Funds Rate, a benchmark rate for overnight bank loans, had been close to zero for years but had risen to 1.0 to 1.25 percent in June. (Equities generally rise when they expect stimulus and accommodation from central banks, so removing stimulus measures can naturally be anticipated to have the opposite effect.) Wall St opened as much as 0.4% in negative territory on Thursday morning.
The committee notes that inflation rates will continue to be monitored closely, but they will not be increasing interest rates as of this time.
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