(Bloomberg) — Federal Reserve officials set an October start for shrinking their $4.5 trillion stockpile of assets, moving to unwind a pillar of their crisis-era support for the economy. They continued to forecast one more interest-rate hike later this year, saying storm damage will have only a temporary impact on the economy.
“Hurricanes Harvey, Irma and Maria have devastated many communities, inflicting severe hardship,” the Federal Open Market Committee said in its statement on Wednesday following a two-day meeting in Washington. “Storm-related disruptions and rebuilding will affect economic activity in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term.”
Policy makers left the benchmark interest rate unchanged in a range of 1 percent to 1.25 percent.
U.S. central bankers are counting on steady growth and low unemployment to raise inflation closer to their goal, which would support their policy of gradual tightening through interest-rate increases and a reversal of quantitative easing.
“When the storm effects fade the economy will be as strong as before they hit, and that requires the gradual normalization of policy to continue,” Ian Shepherdson, chief economist at Pantheon Macroeconomics Ltd., wrote in an emailed note.
The announcement is a third big policy step for Janet Yellen, now in the final year of her term as Fed chair: She has overseen the end of large-scale asset purchases; the liftoff of rates from zero; and now the pullback from an unprecedented balance- sheet buildup without disruption to financial markets or the economy so far.
While the storms will temporarily boost inflation thanks to higher prices for gasoline and other items, “apart from that effect, inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the committee’s 2 percent objective over the medium term,” the Fed said.
The economy expanded at a 2.1 percent annual rate in the first half — in line with the pace during this expansion — and U.S. government 10-year notes yield about 2.24 percent, down from 2.45 percent at the start of the year. The Fed’s preferred price gauge rose 1.4 percent in July from a year earlier.
“The labor market has continued to strengthen” and economic activity “has been rising moderately so far this year,” the Fed statement said. The…