No Fed dread for bond markets with yields near multi-week lows

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The FOMC also said the Federal Reserve would start reducing its $4.5 trillion balance sheet this year, phasing in a new policy under which the proceeds from repayments of Treasury bonds, mortgage-backed securities and other holdings would no longer be reinvested in more bonds.

In a statement Wednesday, the policymakers said that "the labor market has continued to strengthen and that economic activity has been rising moderately so far this year". "The committee now expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated". The Fed also announced plans to start gradually paring its bond holdings later this year, which could cause long-term rates to rise. But Fed officials have said they think inflation will soon pick up along with the economy.

Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

Another rate hike this year is "becoming less of a sure thing as every month of data comes out", said Michael Dolega, senior economist at TD Economics. The initial cap will be set at $10 billion a month: $6 billion from Treasuries and $4 billion from mortgage-backed securities. Those figures would rise in increments over a year until they reached $30 billion a month in Treasurys and $20 billion in mortgage bonds.

Investors are keenly interested in whatever the Fed says about its balance sheet because gradual reductions in its portfolio could raise long-term rates, even if only slightly.

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In view of realized and expected labor market conditions and inflation, the Committee made a decision to raise the target range for the federal funds rate to 1 to 1-1/4 percent.

The US Fed is widely expected to raise the interest rates by 0.25 percentage points when it announces its June policy decision later today. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.

Meanwhile, the testimony of US Attorney General Jeff Sessions and his refusal to detail conversations with President Donald Trump was deemed a "non-event" by some market analysts.

The Fed has in recent weeks wrestled with contradictory signals from unemployment and inflation. The move, to a still-low range of 1 percent to 1.25 percent, will likely lead to somewhat higher rates on some consumer and business loans. Despite that, the Fed's favorite measure of price pressures, excluding food and energy components, rose just 1.5% in the 12 months through April, down from 1.8% in February. The Fed's target for inflation is 2%. The median forecasts for 2018 and 2019, however, were unchanged at 2%. Unemployment has already reached a 16-year low of 4.3 percent.

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