Fed quietly opens the final chapter of its crisis-era bonds policy

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The Federal Reserve said Wednesday that the US economy is strong enough for the central bank to begin reducing its $4.5 trillion balance sheet in October, gradually unwinding a massive stimulus program started after the economy entered a severe recession almost a decade ago. After the financial collapse of 2007-2009, the Fed enacted bond-buying measures to prevent America's largest banks from failing.

USA central bank leaders are expected to hold the key interest rate steady this week, but they may begin trimming a huge bond-buying program that was meant to boost economic growth.

Markets have shown no signs of trepidation in advance of the start of the tapering process.

Nevertheless, markets had other factors to contend with when trying to anticipate the monetary authority's decision come December, as vice-president Stanley Fischer - who was on the more hawkish side of the policy debate - was set to leave beforehand, as Philip Marey at Rabobank pointed out.

The central bank chief said it would take a "material deterioration" in the economy before the Fed backs off the program. So the first step will be that the Fed stops reinvesting the proceeds, rather than outright sales.

"This year, the short fall of inflation from two per cent.is more of a mystery", said Fed chairwoman Janet Yellen at press conference on Wednesday.

Another big question is will the Fed choose to hike rates again in 2017? With many fixed income investors concerned about the effects of higher interest rates, RISE could be an ideal ETF for a rising rate environment. But consistent with its assessment of appropriate policy, while the near-term inflation forecasts were trimmed, the longer term was not.

Despite ... stronger- than-expected CPI report, Fed officials will still be looking at year-over-year core PCE and CPI inflation rates that are three tenths and five tenths lower, respectively, than in March.

The Fed noted that the recent hurricanes in the United States would affect economic activity but are "unlikely to materially alter the course of the national economy over the medium term". That, too, had been widely expected and produced no tangible reaction from the financial markets.

The bank's policymakers are also expected to provide hints with regards to the possibility for an interest rate hike at their two-day meeting in December. But the Fed may slow the pace of projected monetary tightening from there.

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