US Federal Reserve to start unwinding $4.2tn stimulus from October

20 September 2017, 19:11

The US Federal Reserve has confirmed it will start to unwind its massive asset purchase, or quantitative easing (QE), programme from next month.

The country's central bank laid down arrangements for reducing the size of its balance sheet - standing at $4.2tn (£3.1tn) - in a policy announcement that also showed interest rates being kept at their current level.

It maintained its guidance that one further interest rate hike was likely this year despite inflation coming in weaker than expected - adding timid price growth was being "closely" watched.

The post-decision statement signalled that its rate forecast was unchanged because of the continued strengthening of the labour market and wider economic activity - despite a hit from the continuing hurricane season.

While its commentary was of importance to financial markets, with the dollar rising on the prospect of a rate rise in November, the information on the unwinding of its stimulus programme was also being closely-watched.

Three rounds of QE from 2008 saw the Fed buy up US Treasury bonds and mortgage-backed securities in the hope that the sellers - mostly financial services firms such as banks - would use the proceeds to bolster the US economic recovery through investment and lending.

Since that time, the Fed has reinvested the money it got from maturing Treasury bonds to maintain the scale of its support.

Its announcement signalled that it would not yet sell bonds - risking a flood in the market - but scale down the reinvestment slowly by initially cutting up to $10bn each month.

The limit on reinvestment is scheduled to increase by $10bn every three months to a maximum of $50bn for the foreseeable future.

The dollar rose sharply against major international currencies - hitting levels not seen since earlier this month.

It was up more than a cent against sterling at $1.3475.

At a news conference, Fed chair Janet Yellen said it had raised its forecasts for US growth to 2.4% this year despite "severe disruptions" from Hurricanes Harvey, Irma and Maria.

She told reporters US output would rebound as reconstruction got underway.

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