Fed announces $10 billion start to paring its bond holdings

Posted September 22, 2017

The U.S. central bank on Wednesday indicated it still plans to raise interest rates once more by the end of the year, with three more hikes potentially coming in 2018. While the decision to shrink the Fed's balance sheet is much expected, when and how the Fed will manipulate its target for short-term interest rates is less clear. That helped send bank stocks higher.

"Higher prices for gasoline and some other items in the aftermath of the hurricanes will likely boost inflation temporarily", the Fed warned in its statement.

PNC Financial Services rose 1.3 percent. In addition, utilities stocks fell 1.7%, nearing 2017 lows. Month-on-month the growth rate was 1% compared to expectations of 0.2% growth, while year-on-year the increase was at 2.4%.

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 Fed also said it will begin reduction of the Fed's $4.5 trillion balance sheet in October by allowing small amounts of Treasuries and mortgage-backed securities to run off.

High-dividend stocks like household goods makers and utilities fell the most Wednesday afternoon.

Bond prices move in the opposite direction of yields. It also lowered again its estimated long-term "neutral" interest rate from 3.0 percent to 2.75 percent, reflecting concerns about overall economic vitality. Bank of America rose 1.4 percent.

Oil prices were higher. Benchmark 10-year notes fell 11/32 in price to yield 2.29 percent, up from 2.24 percent before the Fed's statement and the highest level since August 8.

Japan´s Nikkei gained 0.2 percent as a rise in USA bond yields lifted financial shares, while the yen´s fall against the dollar after the Fed´s decision helped exporters.

Industrial companies, including airlines, led the gainers Wednesday.

Broad declines were reported in consumer staples, utilities and information technology shares. The Dow gained 63.01 points, or 0.3 percent, to 22,331.35.

The dollar index against a basket of six major currencies was effectively flat at 92.169 after slipping about 0.4 percent overnight.

The 30-year Treasury yield was trading at 2.817-a fall of ~0.19%. The front-month United States oil futures contract was holding onto $50 a barrel at 50.40 as higher than expected crude oil stocks were counterbalanced by a substantial draw in distillate stocks (-5.6 million barrels). It has gained 0.3 percent on the week.

Bed Bath and Beyond plunged 17 percent after reporting earnings and sales that missed analysts' forecasts. The cereal maker slid $3.21, or 5.8 percent, to $52.17.

The Standard & Poor's 500 index was little changed at 2,506. Germany's DAX slipped 0.1 percent to 12,541.67. Economists had expected import prices to rise by 0.4%.

The 10-year yield on Monday touched a almost three-year high at 2.119 per cent.