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US Fed announces plan of $4.5 trillion balance sheet reduction

22 September 2017

The decision comes as the United States central bank sees economic activity "rising moderately," with a labor market that "continued to strengthen" creating "solid" job gains since the Fed's last meeting in July.

There are 16 dots per year, with each one representing an individual member of the Federal Open Market Committee's interest rate forecast for that period.

It is also a policy activity in which Fed officials have no experience, which is perhaps why they chose to slowly escalate the amount of assets they are going to see slide off the balance sheet; this method allows the Fed to see how big of an impact the asset reductions are having, and adjust interest rate policy accordingly.

The Fed aims for a stabilization of the rise in consumer prices of around 2% per year, a goal which it has been moved back to 2019 instead of 2018, as previously. The Fed, though, has yet to achieve its other objective of stabilizing prices at a 2 percent annual rate.

ASIA'S DAY: Japan's Nikkei 225 added 0.1 percent to 20,310.46 and South Korea's Kospi edged down 0.2 percent to 2,412.20.

However, the central bank said the economic impact is likely to be felt only in the near term, citing past experience which has shown that "storms are unlikely to materially alter the course of the national economy over the medium term". Brent crude, used to price global oils, gained 55 cents to $55.69 per barrel in London.

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The Bank of Japan is expected to reassure markets on Thursday that it will lag well behind its USA counterpart in scaling back its massive stimulus, as an improving economy has yet to boost inflation anywhere near its elusive 2% target.

Asian shares were mostly lower and the dollar strengthened Thursday after the Fed said it would start trimming its bond holdings and planned one more interest rate increase this year. This marks the last leg of unwinding of QE programme which had quadrupled the balance sheet to United States dollars 4.5 trillion.

The move, which was widely expected, will see the Fed remove $6bn (£4.4bn, €5bn) of US Treasuries and $4bn of mortgage-backed securities from its balance sheet each month from Q4.

The central bank did, however, offer a rosier picture of the overall economy, upping its economic growth forecast to 2.4% from 2.2%. Market participants expect the unwinding to be a series of gradual adjustments over the years.

"In my view, they need to normalize policy", he said. It will start the process of normalizing its balance sheet from October.

While the backdrop is positive for United States dollars, as a corollary, reversal in recent EM currency appreciation can not be ruled out in the near future. Nevertheless, for currency watchers it remains a key monitorable.

US Fed announces plan of $4.5 trillion balance sheet reduction