The Fed, which stopped its buying spree in 2014, is now preparing to pare back its holdings by about $10 billion per month initially. That is likely to raise borrowing costs for consumers and businesses, but only very slowly. Indeed, since the Fed ended its bond-buying, countervailing factors have actually reduced some borrowing costs, like the average interest rate on 30-year mortgages.
Investors are watching warily, but so far there is little sign that the Fed’s retreat is tightening financial conditions. Stock prices fell modestly after the Fed’s 2 p.m. policy announcement, but bounced back by the end of the trading day. The S&P 500 index rose 1.59 points, closing at 2,508.24.
The yield on the benchmark 10-year Treasury also rose 0.02 percentage points, closing at 2.27 percent.
“The Fed did an extremely good job of preparing us for commencing the balance sheet rundown,” said Peter Hooper, chief economist at Deutsche Bank. “That’s happening with a whimper, but handled differently, it could have been a big event.”
The Fed, which has raised its benchmark interest rate twice this year, left that rate unchanged Wednesday, but indicated that it plans a third rate increase later this year as economic conditions continue to strengthen. The Fed said it expects the labor market to continue strengthening and the economy to expand at a moderate pace.
Twelve of the 16 officials on the Federal Open Market Committee predicted another rate increase this year, the same number as in the Fed’s last round of forecasts in June.
In its post-meeting statement, the Fed pointed to the strength of job growth and increases in household and business spending. The official optimism went only so far, however. Growth remains weak by historical standards, and the Fed indicated it sees no evidence of acceleration. Fed officials once again reduced their expectations for rate increases in coming years. The median prediction Wednesday was that the benchmark rate will stabilize at 2.8 percent, down from a median estimate of 3 percent in June.
The Fed’s benchmark rate now sits in a range between 1 percent and 1.25 percent, a level most Fed officials regard as providing modest encouragement for borrowing.
Expectations of a third rate increase this year strengthened after the Fed’s announcement, rising from a 57 percent chance to a 71 percent chance, according to CME Group.
The Fed’s next meeting is scheduled for Oct. 31 and…