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Fed quietly opens the final chapter of its crisis-era bonds policy

21 September 2017

When the world's most influential central bank started ramping up its balance sheet and promising to keep USA rates near zero for long periods, investors hunting for higher-yielding assets flooded into emerging markets (EM) such as Turkey, Brazil and Indonesia.

That means mid-month and end-of-month maturities would be reinvested evenly, based on the monthly cap.

Markets are pricing in a 58-percent probability of the Fed raising rates in December, according to the CME Group's FedWatch tool.

Fed chair Janet Yellen has said she wants the balance sheet reduction to be as boring as "watching paint dry", and its slow pace seems created to calm markets.

The Fed has $4.5 trillion in assets on its balance sheet as the result of its stimulative bond-purchase program. Fed officials have predicted the overall portfolio could shrink to between $2.5 trillion to $3.5 trillion by early next decade, though they have stressed there is no need to decide any time soon.

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The Fed did not raise its benchmark interest rate, as expected.

BONDS: Bond prices fell after the Fed announcement.

US stock indexes overcame an afternoon wobble to close mostly higher Wednesday after the Federal Reserve said it would start reducing its huge bond portfolio and was still on track to raise interest rates later this year. Lower rates promote growth.

Its cautious confidence reflected steady economic growth in the face of bouts of overseas weakness, and a USA unemployment rate whose drop has been almost uninterrupted over the last seven years to 4.4 percent last month. Rates had previously been cut to a record low after the 2008 financial crisis, helping to fuel a multiyear global stock boom.

Yet Yellen and her predecessor, Ben Bernanke, have largely brushed off those concerns with a gradual and sometimes halting march to a more normal policy stance.

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High-dividend stocks like utilities and household-goods-makers fell. It also now thinks that the eurozone will grow by 2.1 percent this year, 0.3 percentage point more than its previous prediction in June. Yet the Fed's decision to begin winding down one of its most controversial policies of the crisis era, which attracted sharp criticism from congressional conservatives and economic purists over the last decade, amounted to a bold bet on the US economy's prospects. Zions Bancorporation climbed 70 cents, or 1.6 percent, to $45.11.

The Bank of Japan, as widely expected, also left its policy settings unchanged.

The dollar's gains come after a run of losses in recent months as tepid inflation and a lack of movement on Donald Trump's economic agenda in Congress had seen investors bet on no more rate hikes this year.

Several Fed officials have signaled the central bank could take a first step in selling off its bonds and other investments starting next month.

If done incorrectly, it could have a disastrous effect on the stock and bond markets. She declined to say if she wants to stay on after her term expires in February.

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