Yellen mum on whether she'll lead the Fed again

Mark Lennihan — The Associated Press file

Mark Lennihan — The Associated Press file

September's meeting is key because the Federal Reserve is expected to announce plans to unwind its massive $4 trillion balance sheet - a formal process for tightening monetary policy.

The Fed left interest rates unchanged on Wednesday but signaled it still expects one more increase by the end of the year despite recent weak inflation readings. "Storm-related disruptions and rebuilding will affect economic activity in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term".

The Fed described the USA economy as healthy, with moderate growth, solid job gains, momentum in business fixed investment and low inflation. US benchmark 10-year Treasury note yields rose as far as 2.29 percent, the highest since August 8., a move which helped push bank stock prices higher also.

The central bank has raised that rate three times since December as the economy has gradually improved.

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Linked to the latter in particular, according to the CME's Fed Watch tool as of 2107 BST Fed funds futures were pointing to 71.9% odds of a 25 basis point rate hike in the central bank's main policy rate on 13 December. FOMC chair Janet Yellen will then address reporters at a press conference at 7:30pm.

Ms Yellen said she thinks the sluggish inflation rate is the result of temporary factors including lower cell phone costs that don't reflect underlying economic trends.

In July, the core personal consumption expenditure (PCE) index, Fed's favor inflation indicator, rose only 1.4 percent year on year, below Fed's two percent target and also lower than the 1.9 percent in January.

Fed officials brought down their expectation for where they see interest rates settling in the longer run, to 2.75% from an earlier forecast of 3%.

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Below are four more developments - in addition to the change in the Fed's policy of reinvesting all maturing debt - that may lead Treasury yields to continue their resurgence over the next few months. "Maybe the reality is starting to sink in for the market that they really do want to go in December", said Tom Porcelli, chief USA economist, RBC Capital Markets, New York. "The bond markets have fairly strong conviction that low inflation and low growth will persist", said Hiroko Iwaki, senior strategist at Mizuho Securities. That figure would inch up by $10 billion each quarter until it reaches $50 billion in monthly reductions a year from now.

The Fed's decision to exit from balance-sheet policies comes a decade after the global financial crisis began to tip the economy into a recession at the end of 2007.

The central bank announced its decision Wednesday afternoon after two days of meeting in Washington - opting to keep the short-term target range at 1-1.25 percent.

She also said if prices rose too quickly the bank would be able to lift rates quicker. The Fed said it would begin shedding some of the $4.5 trillion in investments starting next month. Yellen's four-year term as chair will end on February 3.

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"While we do not expect USA yields or the Dollars to move much on what would be a well-telegraphed balance sheet announcement this week, there is a non-trivial risk of the Fed delaying this process".

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