Coverage: Fed leaves interest rates alone, but will unwind

The Federal Reserve Board left interest rates alone on Wednesday but said it will begin undoing the steps it took to prop up the economy for almost a decade after the financial crisis by shedding some of its $4.5 trillion in investments starting next month.

Donna Borak of CNNMoney.com had the news:

The announcement marks a milestone in the long recovery from 2008, and reflects confidence by Fed officials that the economy will continue to grow.

Starting in October, the Fed will begin unloading $10 billion of debt from its so-called balance sheet, including $6 billion in Treasury securities and $4 billion in agency debt each month through December.

For years, the central bank piled up purchases of Treasury and mortgage-backed securities, a strategy intended to stimulate the economy by reducing borrowing costs for everyone. At the time, it also reduced its benchmark interest rate to zero, and only began raising it in December 2015, seven year after the crisis.

On Wednesday, the Fed left rates unchanged, hovering between 1% and 1.25%.

Jim Puzzanghera and Don Lee of the Los Angeles Times reported that Yellen defended the bond buying program:

Yellen also defended the controversial bond-buying effort begun under her predecessor, Ben S. Bernanke, which she said had helped the economy recover more quickly from the Great Recession of 2007-09.

With the recovery now “on a strong track,” the extra stimulus from the bond purchases is no longer needed, she said.

“I think that the American people should feel the steps we are taking to normalize monetary policy are ones that we feel are well justified given the very substantial progress we’ve seen in the economy,” Yellen said.

Earlier Wednesday, Yellen and her colleagues voted unanimously to leave the Fed’s benchmark short-term interest rate unchanged. They signaled another small rate hike is coming by the end of the year.

But the recent devastation caused by severe hurricanes could make it difficult for Fed officials to get a solid read on the economy in the coming weeks.

Binyamin Appelbaum of The New York Times reported that the Fed set the stage for a December rate hike:

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.