Fed keeps rates unchanged, to start trimming bond holdings in October

The US Federal Reserve said on Wednesday it would keep policy interest rates unchanged at 1-1.25 per cent even as it signalled yet another rate hike before the end of the year.

''In view of realised and expected labor market conditions and inflation, the committee decided to maintain the target range for the federal funds rate at 1 to 1-1/4 per cent,'' the Federal Open Market Committee (FOMC) said in a release.

Information received since the Federal Open Market Committee met in July indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have remained solid in recent months, and the unemployment rate has stayed low.

Household spending has been expanding at a moderate rate, and growth in business fixed investment has picked up in recent quarters. On a 12-month basis, overall inflation and the measure excluding food and energy prices have declined this year and are running below 2 per cent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

The FOMC said its monetary policy stance would remain accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 per cent inflation.

It forecasts only two increases in interest rates in 2019 and one in 2020. It also lowered again its estimated long-term "neutral" interest rate from 3.0 per cent to 2.75 per cent, reflecting concerns about overall economic vitality.

The Fed, as expected, also said it would begin in October to reduce its approximately $4.2 trillion in holdings of US Treasury bonds and mortgage-backed securities by initially cutting up to $10 billion each month from the amount of maturing securities it reinvests.

That action will start a gradual reversal of the three rounds of quantitative easing the Fed pursued between 2008 and 2014 to stimulate the economy after the 2007-2009 financial crisis and recession.

The limit on reinvestment is scheduled to increase by $10 billion every three months to a maximum of $50 billion per month until the central bank`s overall balance sheet falls by perhaps $1 trillion or more in the coming years.

FOMC meeting in July had indicated a strengthening of the labor market and a moderate rise in economic activity this year.

''Job gains have remained solid in recent months, and the unemployment rate has stayed low. Household spending has been expanding at a moderate rate, and growth in business fixed investment has picked up in recent quarters.''

''On a 12-month basis, overall inflation and the measure excluding food and energy prices have declined this year and are running below 2 per cent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance,'' it noted.