Fed announces a start to modestly reducing its bond holdings

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"The basic message here is that USA economic performance has been good", Fed chair Janet Yellen said at a press conference. The US Federal bought large quantities of Treasury and mortgage bonds way back during the global financial crisis of 2007 to 2009, which was done in a move to push down long-term borrowing costs and to unfreeze the credit cycle which was drastically stalled by the consequences of financial crisis.

The Dow finished at its seventh straight record Wednesday with banking shares rallying after the Federal Reserve kept alive the chance of a December interest rate increase.

Yellen, has said she is hopeful the unwinding will be as uneventful as "watching paint dry" and the Fed plans to reduce its balance sheet in such a slow and steady manner that it will not affect the wider economy.

The Fed also announced it will begin a "drawdown"-a move to decrease the number of assets remaining on its balance sheet-next month".

Meanwhile, 12 out of 16 Fed officials said they expect one more raise in short-term interest rates this year, the Wall Street Journal reported.

The US dollar declined on Wednesday as markets anticipate the outcome of the Federal Reserve's monetary policy meeting.

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"The labor market has continued to strengthen and. economic activity has been rising moderately so far this year", the central bank said in its statement. "Maybe the market has been overweighting the importance of the data and that's why the market expectations are very different than what the Fed is saying". But inflation is still running below the Fed's 2 percent target. The Fed has been broadcasting the move for almost a year, including outlining its methods for doing so in June, and so it was mostly expected.

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. Today's messaging from the Fed essentially drove investors into the U.S. Dollar since the odds of a rate hike in December increased based on the Fed's statement.

"Despite expectations for strong dollar demand for settlement purposes, the USA currency drew only moderate purchases", a currency broker said.

Gagnon is a senior fellow at the Peterson Institute for International Economics who used to work at the Federal Reserve.

Their projections remained the same as in June for the unemployment rate, which is forecast to be at 4.3 percent by the end of the year, and inflation, which is expected to be at an annual 1.6 percent rate by the end of 2017.

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