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December 10, 2019

US Federal Reserve remained key interest rate unchanged

US Federal ReserveThe US Federal Reserve remained key interest rate unchanged at range 1.00% – 1.25%. The US central bank raised interest rates twice since the beginning of the year by 25 basis points. The normalization of monetary policy began in December 2015, when interest was raised for the first time in nearly a decade.

After a two-day meeting, the Fed issued a statement announcing that its balance sheet will begin to contract in September. Then the central bank will start shrinking its portfolio of bonds worth 4.5 trillion USD. The amount was mainly accrued in the years after the crisis.

“The Commission expects to start implementing the program to normalize its balance sheet fairly soon if the economy develops in line with expectations”, says the statement of Fed.

According to the analysts “fairly soon” is the key in the text. Observers watched rhetoric and expected the phrase to change from “this year”, as it was in the June text.

The balancing efforts will include a procedure whereby a specified amount of bonds reaches their maturity every month and the remainder as usual will be reinvested. The program will start with 10 billion USD per month, and this amount will increase each quarter to 50 billion USD. The Fed estimates that once the program is over, the balance will be just over 2 trillion USD.

According to Fed Chairman Janet Yellen, shrinking the balance sheet should not cause market turmoil, although there are fears that interest will rise if demand for bonds is not strong. The Fed has broadened its balance in an attempt to support the economy that was on the brink of collapse during the crisis.

In its assessment of the economy, the Monetary Policy Committee retained its assessment that “activity is moderating this year”. As for inflation, economists say it remains “below 2%”. In the previous June text, the phrase was “just under 2%” and it is a signal that central bankers are a little more pessimistic about when they will achieve the goals they mandate.

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