Investors tread carefully ahead of Fed decision

Investors tread carefully ahead of Fed decision”

Sept 19 (Reuters) - U.S. stocks were little changed on Tuesday as investors held back from making major bets ahead of the Federal Reserve's policy meeting that is expected to roll out a plan to pare the central bank's debt holdings. Wall Street futures augured a lukewarm start.

The Australian Dollar US Dollar (AUD USD) exchange rate was marred by volatility at the start of this week's session as investors become unsettled ahead of the Federal Reserve policy meeting on Wednesday.

Fed policymakers chose to leave the central bank's short-term benchmark interest rate between 1 per cent and 1.25 per cent, but also said they still expect to increase the rate one more time this year and three times in 2018, if persistently low inflation rebounds. For comparison, the economy grew at only a 1.2 percent rate in the first quarter of the year.

Financial shares added to gains following the statement, with the S&P 500 bank index ending up 0.7 percent, while utilities declined 0.8 percent. And next year, it's forecasting growth of 1.9 per cent for the eurozone, 0.1 percentage point more than previously thought, but below its 2.4 per cent projection for the U.S. The big three eurozone economies - Germany, France and Italy - all saw upward revisions. The Fed also accepted that the recent hurricanes will cause near-term disturbances, but the underlying trajectory of the economy was not likely to be altered. Investors won't pay too much attention to the "dots" after this year since the composition of the Fed board is expected to change quite a bit in the next year. The S&P 500 added 0.1%, while the Nasdaq Composite rose 0.2%. The portfolio primarily consists of government and mortgage-backed bonds. Officials also said they plan to start unwinding the at the USA central bank's $4.5 trillion balance sheet next month by reducing its bond holdings, which will gradually increase long-term borrowing rates. If that were to happen, long-term rates might surge undesirably high, which could weigh on the economy.

Some economic indicators suggest higher rates are warranted: The unemployment rate, at 4.4 percent in August, is below the level most officials regard as sustainable, which the Fed historically has treated as a signal for higher rates. Benchmark 10-year notes last fell 2/32 in price to yield 2.2375 percent, from 2.23 percent late on Monday.

"Anything he says that doesn't sound dovish, the market will take it as hawkish", Amundi's Upadhyaya said.

No Fed officials dissented on the decision. The kiwi may test support near 0.72 against the greenback and 1.66 against the euro. Market expectations for a December interest rate hike have risen in recent days, with the CME Group's FedWatch tool reflecting a 62.7 percent probability for at least one additional rate hike by year-end.

The November crude contract was up 79 cents at US$50.69 per barrel.

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