Gold hits 3-week low; Fed rate hike outlook weighs

Gold hits 3-week low; Fed rate hike outlook weighs

Gold hits 3-week low; Fed rate hike outlook weighs

Shares of U.S. banks shot to a six-month high on Wednesday afternoon, lifted by a sharp rise in bond yields after the U.S. Federal Reserve signaled it was likely to raise interest rates again by the end of the year.

The Fed also said it will begin reduction of the Fed's $4.5 trillion balance sheet in October by allowing small amounts of Treasuries and mortgage-backed securities to run off.

New economic projections released after the Fed's two-day policy meeting showed 11 of 16 officials see the "appropriate" level for the federal funds rate, the central bank's benchmark interest rate, to be in a range between 1.25 percent and 1.50 percent by the end of 2017. The central bank has raised its benchmark rate twice this year, in March and June, and markets were expecting at least one more increase this year. After its first rate increase in 2015, however, the central bank didn't again hike its short term rate for a year, thanks to economic weakness in the U.S. and unstable global markets. The massive amount of assets was accumulated by the Fed in the wake of the 2007/2008 financial crisis, and under a program called "quantitative easing" (QE), meant to spurr economic activity in the United States.

A trader works on the floor of the New York Stock Exchange (NYSE) in New York, U.S., September 8, 2017.

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Hurricane's Harvey and Irma have left a slough of destruction in the wake, all of which will impact on economic growth and will favour a cheaper borrowing climate to rebuild, encouraging the Fed to stand still on rates.

In the case of QE, the Fed's stimulus brightened the outlook for growth and inflation, while the periods in between refocused investors on the mediocre state of the post-crisis economy.

As a result, the central bank's balance sheet will shrink over time, drying up a source of liquidity and acting as a small interest rate increase. In the event, Chair Yellen's comments largely stuck to the script: inflation has been held down by some transitory factors and should return to the Fed's 2% objective as those factors dissipate and tighter economic and labour market conditions put upward pressure on prices.

The Fed's preferred measure of inflation was down to 1.4 percent on an annualized basis as of July, well short of its medium-term 2 percent target.

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The slump came as "the Fed's monetary policy update sees investors flee from the non-yielding asset", said analysts at Accendo Markets in a note. In the longer term, the median member expects rates to settle around 2.75%.

Markets have priced in a near-zero chance that the Fed will change interest rates.

Reducing the massive balance sheet is not without risks.

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