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Gold Falls After Fed Says Balance Sheet Reduction To Begin In October


(Kitco News) - Gold prices dropped as the U.S. Federal Reserve said it will begin shrinking its $4.5 trillion balance sheet in October.

Immediately after the announcement, the yellow metal began to plummet, with December Comex gold last seen trading at $1,306.20, down 0.34% on the day.

In a widely expected decision, the Fed said it will begin to unwind its $4.5 trillion in holdings of U.S. Treasury bonds and mortgage-backed securities in October by cutting up to $10 billion per month from maturing securities it reinvests.

This amount will increase by $10 billion every quarter to a maximum of $50 billion per month until the balance sheet declines by at least $1 trillion.

“Our balance sheet is not intended to be an active tool for monetary policy in normal times. We, therefore, do not plan on making adjustments to our balance sheet normalization program. But of course, as we stated in June, the Committee would be prepared to resume reinvestments if a material deterioration in the economic outlook would warrant a sizeable reduction in the federal funds rate,” Fed Chair Janet Yellen said at a press conference following the central bank’s announcement.

The Fed also kept its interest rates unchanged in a target range of 1% to 1.25%, but signaled that another rate hike is possible in 2017.

“This accommodative policy should support some further strengthening in the job market and return to 2% inflation consistent with our statutory objectives,” Yellen said.

New economic projections showed that eleven out of sixteen officials view the federal funds target rate between 1.25% and 1.50% as “appropriate” by the end of 2017.

The central bank added that it still sees at least three rate hikes next year, but said it estimates only two rate increases in 2019 and one in 2020. The Bank also downgraded its long-term “neutral” interest rate from 3% to 2.75%.

“The labor market has continued to strengthen ... economic activity has been rising moderately so far this year,” the Fed said in a statement, adding that inflation will be watched “closely.”

Economic projections remained largely unchanged for the next couple of years. GDP is estimated to grow at 2.4% in 2017, 2.1% in 2018, and 2% in 2019. The unemployment rate is expected to stay at 4.3% this year, and then fall to 4.1% in 2018, and remain there in 2019. Inflation is projected to run under the Fed’s 2% target in 2018 and only reach it in 2019.

The policy statement also highlighted that hurricanes the U.S. saw recently are “unlikely to materially alter the course of the national economy over the medium term.”

Economists said the Fed announcement didn’t have a lot of surprises, but markets are reacting to the news of a possible third rate hike this year.

“Everybody actually knew both of those outcomes, so the focus is on what was said about rate hikes down the road. In particular, the median forecast sticks to the view that there is one more hike this year, and three more next year,” Avery Shenfeld and Royce Mendes, economists at CIBC World Markets, said in a note.

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