Federal Reserve reveals start of balance sheet reduction in October

Posted September 22, 2017

On Wednesday, the Fed announced it would begin the reductions next month based on a plan approved in June.

That nudged MSCI's index of world stocks to a new all-time high while futures prices pointed to a new record high on Wall Street. They continued to forecast one more interest-rate hike later this year, saying storm damage will have only a temporary impact on the economy.

Sony Corp declined 1.5 percent after Credit Suisse cut its rating to "neutral" from 'outperform, ' citing slow growth in its gaming business over the next few years. Bond yields rose, leading to gains for banks but losses for high-dividend stocks like household goods makers and utilities.

Caterpillar was up 1.6 percent, following an upgrade from UBS to "buy" from "neutral". The caution in raising rates comes as inflation has consistently stayed below the Fed target of 2 percent. Imports picked up an annual 15.2 percent to 6.164 trillion yen versus expectations for 11.6 percent and down from 16.3 percent a month earlier. More so, Asian stocks had slightly moved ahead of the Fed's monetary policy publication far ahead in the said period.

As yields rise, fixed-income investors may find it harder to sit with traditional bond exposures.

Kraft Heinz fell 1.8 percent and NRG Energy lost 1.5 percent. The move reflects a strengthened economy and could mean higher rates on mortgages and other loans over time. In particular, see his article "On Shrinking the Fed's Balance Sheet", and his American Banker piece with Norbert Michel on the Fed's precarious balance sheet situation. "Whether the USA yields will rise or not is also in focus", said Masayuki Kubota, chief strategist at Rakuten Securities. The U.S. 10-year Treasury yield climbed to 2.264 percent, its highest level since August 1.

The dollar index rose 0.75 percent, with the euro down 0.03 percent to $1.1888. "This puts a little pressure on gold", said Jeff Klearman, portfolio manager at GraniteShares, a provider and manager of exchange traded funds.

The New Zealand dollar rose above 73 United States cents as financial markets await the outcome of the Federal Reserve policy meeting tomorrow and ahead of local balance of payments and economic growth data in the next two days.

The Dow is up 2,649.99 points, or 13.4 percent.

The Standard & Poor's 500 index was up a fraction of a point at 2,507. Eastern. The Dow Jones industrial average had edged up a mere 0.1 percent.

After the statement traders were betting on a roughly 67 percent chance of a December hike, compared with 51 percent minutes before, according to the CME Group's FedWatch tool.

In a speech early this month, influential New York Fed President William Dudley said while he was surprised that inflation had been so low, steady growth of the economy should eventually push wages higher, allowing the Fed to continue to raise rates "gradually".

Federal Reserve Chair Janet Yellen testifies on Capitol Hill in Washington on July 13, 2017.

Cereal maker General Mills was also down 8 percent after reporting a disappointing quarter.