The Federal Reserve took the first tentative steps Wednesday to unwind its history-making economic stimulus.

As markets expected, the U.S. central bank announced it will begin to roll off its $4.5 trillion balance sheet in October. Most of those assets consist of the Treasurys and mortgage-backed securities it acquired under a program known as quantitative easing.

At the same time, the Fed did not raise its benchmark interest rate from its current 1 percent to 1.25 percent target, but indicated that one more hike is likely this year. Officials also projected one fewer rate hike than initially forecast between now and 2019.

As the forecast stands with this week's revisions, there would be three increases in 2018 and two in 2019.

Stocks retreated slightly after the announcement.

The balance sheet reduction program merited just a brief mention near the end of the statement released after the two-day meeting. The policymaking Federal Open Market Committee stated only that the "balance sheet normalization program" as outlined in June will commence next month. </s> The Federal Reserve says it will start in October to gradually unwind its $4.5 trillion balance sheet, which expanded to unprecedented levels in efforts to spur economic growth after the 2008 financial crisis.

The balance sheet primarily consists of government and mortgage-backed bonds. As the bonds mature, the Fed plans to spend less money each month to replace them, which reduces the balance sheet. The U.S. central bank intends to spend $10 billion less on bonds beginning next month, a figure that will eventually reach $50 billion a month in October 2018.

Fed officials decided to keep their short-term benchmark rate between 1 percent and 1.25 percent. The Fed views the job market as strengthening, but it notes that inflation is running below its 2 percent annual target.

Still, the Fed said in a statement that prices for gasoline and other items might temporarily spike because of the damage caused by Hurricanes Harvey, Irma and Maria. </s> US Federal Reserve on Wednesday raised the benchmark interest rates for the fourth time since December 2015 and unveiled plan to start trimming its balance sheet.

“In view of realised and expected labour market conditions and inflation, the (Federal Open Market) Committee decided to raise the target range for the federal funds rate to 1% to 1.25%,” Xinhua quoted Fed as saying after concluding its two-day monetary policy meeting.

The central bank acknowledged the continuous progress in labour market while expressed their concerns over weak inflation.

Fed officials lowered their forecast for unemployment rate for 2017 down to 4.3%, compared to 4.5% projection made in March, while their forecast for inflation rate in 2017 was revised down to 1.6% from their forecast of 1.9% in March. </s> The Federal Reserve Open Markets Committee (FOMC) begins its deliberations today, which will be followed tomorrow, September 20, by a meeting statement, a summary of projections, and a press conference by the Chair.

This Federal Reserve meeting would be stepping out of the ho-hum character that recent meetings have acquired, as the Federal Reserve policy begins to acquire an aggressive edge. The central bank is expected to announce the timing to initiate the quantitative de-easing or balance sheet normalization program for its $3+ trillion bond portfolio that was built-up in response to the 2008 financial crisis. Most likely, the expectation is for this program to begin on October 1 and follow the wind-down path laid out in an earlier meeting.

The key question now remains whether the Federal Reserve will follow-through on its final interest rate increase for the year in December. The question assumes great importance, for a December interest rate increase will be too close to the initiation of a balance sheet rollback, expected to begin October 1, and can run the risk of over-tightening in a short span of time.

We had observed in the June article, Will the Federal Reserve Avoid A Slowdown, that:

Monetary Policy along with Earnings and Economy are three key determinants for market valuation. All three have been supportive of the stock market, creating a Goldilocks situation which has allowed the market to remain resilient - in spite of growing predictions for a deep correction and bear market fears from leading money managers, as pointed in our past articles.

However, a sharpening of the monetary policy elevates the risk of a US economic slowdown, thus beginning to change the supportive framework for the stock market and deviate from the synchronized global growth that has sent stocks higher.

Consequently, the level of flexibility that the Federal Reserve demonstrates on Wednesday, through its official comments, and in the press briefing, that its projected final interest rate increase this year is not baked-in, can determine how favorably the stock market responds. Note that the decision on the last interest rate increase for the year will not be clear until the December 12-13 meeting.

At present, the chance of a December rate increase, based on interest rate futures, is placed at 58%, up from 53% a week ago and 41% a month ago. Recall that the present Federal Funds interest rate band is at 100-125 basis points.

It seems more members of the 9-member voting committee are inclined to be driven by improvement in inflation metrics, instead of raising rates and expecting inflation to improve towards the 2% target in the future. These include Governors Lael Brainard, Neel Kashkari (Minneapolis), Charles Evans (Chicago), and Robert Kaplan (Dallas). In fact, Governor Neel Kashkari even mused recently that the current pace of interest rate increases has been aggressive and the economy is already beginning to pay a cost. It is his belief that the Federal Reserve is "overestimating how tight the labor market is," which can contribute towards explaining the low inflation and low wage growth.

Less than robust economic reports for August on nonfarm payrolls, retail sales, and inflation, lend credence to Governor Kashkari's reasoning and the overall argument for a more patient interest rate policy.

Many of the arguments for raising interest rates hinge upon the typical Phillips Curve, created by economist A. W. Phillips, which quantifies the inverse relationship that exists between an economy's unemployment rate and the commensurate rise in inflation through wage growth. So simply put, low unemployment translates into high inflation and vice-versa.

There is a wave of deflationary forces that continue to be unleashed as a result of improving economic efficiency. Just ask Target (TGT), Costco (COST), Best Buy (BBY), Kroger (KR) and Wal-Mart (WMT) how they are competing in a world of Amazon (AMZN), Google (GOOGL), and Facebook (FB). The famed Toys R'Us retail store chain filed for bankruptcy today in this new environment that is severely punishing for traditional retailers that find it difficult to adapt.

Technology is undermining the typical relationship of a low unemployment rate leading to inflation and appears to have meaningfully depressed the inflection point at which wage inflation may respond forcefully to low unemployment. Perhaps it is The Great Recession that has unhinged past relationships and recast traditional inflection points.

How robust is the Phillips Curve relationship between Unemployment and Inflation?

In an analysis done last year, in the post-Great Recession era, economist Olivier Blanchard reestimated the Phillips Curve and discovered that the relationship between unemployment and inflation has lost its steepness and is much flatter today.

In a posting 3 weeks ago, Federal Reserve Bank of St. Louis President James Bullard took the estimates of Blanchard to come up with the possibilities of inflation for different unemployment rate scenarios, which are presented below.

Reviewing the data, there appears to be significant room for Unemployment to still drop without spiking inflation. For every 50 basis point decline in the unemployment rate, there is a commensurate 10 basis point rise in the inflation rate. A declining unemployment rate no longer appears to provoke inflation to the same degree as in the past.

At the same time, inflation expectations, which play a key role in economic behavior, remain well-anchored amongst businesses and consumers.

Based on this outlook, the Federal Reserve should not feel chained by past norms to pursue a rising interest rate policy in a new paradigm where unemployment rate and inflation linkage has weakened considerably. There continues to be room for strategic patience.

Even though stocks have entered into a period of near-term elevated risk due to developments on the monetary policy front, and uncertain fiscal policy, the overall picture beyond near-term remains in favor of stocks, as discussed in the article, Partial Eclipse Maybe, But Not A Total One.

Any suggestion of an open-minded approach towards the next rate increase, which brings down the probability of a hike in December, will be considered accommodative and favorable to the stock market.

Amongst the many promising sectors, we believe Biotech stocks present a strong case for a higher portfolio allocation, and should continue to do well for the remainder of the year. The recent revival of another attempt to repeal the Affordable Care Act adds uncertainty till the end of September. But we believe Biotechs remains favorably poised and ready for further gains as discussed in the Biotech Bonanza article.

At this time we remain fully invested in our Prudent Biotech Portfolio, which is up +22% as of the end of August, and less than fully invested in our Graycell Small Cap Portfolio, which is up +36%. Some of the promising biotech and small-cap companies that can be considered for a portfolio include Celgene (NASDAQ:CELG), Exelixis (EXEL), Puma Biotechnology (PBYI), Acadia Pharmaceuticals (ACAD), Bluebird (NASDAQ:BLUE), Aerie Pharmaceuticals (NASDAQ:AERI), Novocure (NASDAQ:NVCR), Foundation Medicine (NASDAQ:FMI), Exact Sciences (NASDAQ:EXAS), Dynavax (DVAX), Amicus Therapeutics (FOLD), Arena Pharmaceuticals (ARNA), Myokardia (MYOK), Esperion Therapeutics (ESPR), Glycomimetics (NASDAQ:GLYC), Akebia Therapeutics (NASDAQ:AKBA), Loxo Therapeutics (NASDAQ:LOXO), Portola Pharmaceuticals (PTLA), Sangamo Biosciences (SGMO), Abeona Therapeutics (ABEO), Kronos Worldwide (KRO), Kemet (KEM), Weight Watchers (WTW) and Chegg (CHGG).

A balance sheet rollback should have a qualitatively similar impact as an interest rate hike - and doing both in close proximity, in our opinion, can have the economic impact of a double rate hike. This appears to be a riskier approach, particularly since it is not yet completely understood how quantitative de-easing may impact the economy, and what could be the unanticipated risks of a rollback.

In addition, geo-strategic concerns, the economic impact from two major hurricanes, and fiscal paralysis are other important considerations that call for the Federal Reserve to tread lightly on the interest rate pedal at a time when it is removing quantitative easing.

We believe signs of a restrained posture with regards to further interest rate increases this year will provide momentum for stocks to move higher, as it diminishes the risk of a Federal Reserve induced slowdown.

Even though there is the possibility of elevated risk for stocks during September and October, as detailed in the Partial Eclipse article, we believe a higher stock allocation (QQQ) (SPY) for the remainder of the year remains justified at this time.

Author's note: As always, kindly do your own due diligence. For additional information and helpful links, please check the Profile by clicking on the name above. Also, you can consider clicking the Follow button to receive such information immediately when published. Please feel free to add to this commentary or point out errors in the Comments section. Opinions can change with time and additional data.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Graycell Advisors or Prudent Biotech is not a registered investment advisor (RIA) and publishes quantitative-driven model portfolios for investors and RIAs. More can be learned from GraycellAdvisors.com. Some or all of the companies/stocks mentioned in the article may be now or in the past, part of the various model portfolios. In addition, although there are no personal positions presently, stocks mentioned can be part of portfolios of family and associates. Past performance is not a guarantee of future results. The information here is only provided for a general informational purpose and not as a recommendation, and is not guaranteed to be complete or accurate. Companies mentioned here may not be favored in the future as market trend changes and/or new information emerges, and no portfolio updates will be provided unless you are a model portfolio subscriber. Opinions, where expressed, can change with time and new information. </s> WASHINGTON — The Federal Reserve is raising a key interest rate for the first time in a year, reflecting a resilient U.S. economy and expectations of higher inflation. The move will mean modestly higher rates on some loans.

The Fed is signaling that additional rate increases will likely be made slowly as the economy improves and inflation edges closer to the Fed’s 2 percent target.

The central bank is increasing its benchmark rate by a quarter-point to a still-low range of 0.50 percent to 0.75 percent. The Fed last raised the rate in December 2015 from a record low near zero set during the 2008 financial crisis.

President-elect Donald Trump’s plans for tax cuts and infrastructure spending have led investors to expect that inflation will pick up in coming months. </s> WASHINGTON—The Federal Reserve has raised its benchmark interest rate for the third time in six months, providing its latest vote of confidence in a slow-growing but durable economy. The Fed also announced plans to start gradually paring its bond holdings later this year, which could cause long-term rates to rise.The increase in the short-term rate by a quarter-point to a still-low range of 1 per cent to 1.25 per cent could lead to higher borrowing costs for consumers and businesses and slightly better returns for savers.The central bank chose to raise rates again despite an economic slowdown at the start of 2017, which it predicts will prove temporary. It foresees one additional rate hike this year, unchanged from its previous forecast. It gave no hint of when that might occur.Read more:U.S. Federal Reserve hikes interest rate for second time in 3 monthsArticle Continued BelowToronto, New York markets see modest losses as U.S. Fed releases meeting minutesNorth American markets rally as U.S. Federal Reserve hikes interest ratesThe latest Fed rate hike, announced in a statement after a policy meeting, comes as the U.S. economy is growing only sluggishly. Even so, many of the barometers the Fed monitors most closely have given it the confidence to keep gradually lifting still-low borrowing rates toward their historic norms. </s> The Federal Reserve is likely to raise short-term interest rates by a quarter percentage point after its two-day policy meeting concludes Wednesday, the fourth such increase since December 2015. Officials also will release new projections for the economy and interest rates, and could announce their plan for shrinking the Fed’s portfolio of Treasury and mortgage bonds. The central bank will release a statement and the forecasts at 2... </s> WASHINGTON: The US Federal Reserve kept its benchmark interest rate unchanged Wednesday and announced the gradual end to a crisis-era stimulus program in a sign the economy is on sound footing.

The Fed statement following its two-day policy meeting noted that the devastation caused by Hurricanes Harvey, Irma and Maria are “inflicting severe hardship” on communities.

However, the central bank said the economic impact of the storm is likely to be felt only in the near term.

 It cited past experience which has shown that “the storms are unlikely to materially alter the course of the national economy over the medium term.”

Higher prices for gasoline and some other items “in the aftermath of the hurricanes will likely boost inflation temporarily.”

However, 12-month inflation is still expected to remain below the Fed’s two percent goal in the near term, stabilizing at the target rate only in the medium term.

The Fed gave few hints on the likelihood of a third rate increase this year, as the statement was little changed from the prior versions, so analysts will have to watch for Fed Chair Janet Yellen’s post-meeting press conference for further indications.

The committee did say that despite the hurricane impact, the Fed “continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and the labor market will strengthen somewhat further.”

But that language too was nearly identical to the prior statements.

Despite nearly seven years of uninterrupted job creation and a very low unemployment rate of 4.3 percent, inflationary pressures and wage gains have been tepid at best, something that has baffled economists given the strong labor market.

But with inflation finally showing signs of life in August, more analysts now see an increased chance of a rate increase in December.

The central bank also confirmed that it will end an unprecedented stimulus program launched at the height of the financial crisis, when the Fed had cut rates to zero and had no ammunition left to help support the economy.

 The plan starting next month will gradually reduce the size of the Fed’s $4.5 trillion in investment holdings, which were built up during the financial crisis.

In the final three months of this year the Fed will reduce its holding of US Treasury debt and mortgage-backed securities by $10 billion, and will reduce it by an additional $10 billion every three months until October 2018 when the rate hits $50 billion a month.

The Fed has said the “normalization” program is designed to run in the background, to avoid roiling financial markets. And the Fed will not be selling securities, but will simply let the debt mature and roll off its balance sheet. </s> WASHINGTON — The Federal Reserve is raising a key interest rate for the first time in a year, reflecting a resilient U.S. economy and expectations of higher inflation. The move will mean modestly higher rates on some loans.

The Fed signaled in a statement Wednesday that additional rate increases will likely be made slowly as the economy improves and inflation edges closer to the Fed's 2 percent target.

The central bank is increasing its benchmark rate by a quarter-point to a still-low range of 0.5 percent to 0.75 percent. The Fed last raised the rate in December 2015 from a record low near zero set during the 2008 financial crisis.

President-elect Donald Trump's plans for tax cuts and infrastructure spending have led investors to expect that inflation will pick up in coming months.

The economy, after growing at an anemic annual rate of 1.1 percent in the first half of this year, accelerated to a 3.2 percent pace in the July-September quarter. That pickup has lifted hopes that the economy will keep rising, fueled by steady hiring gains. The unemployment rate is at a nine-year low of 4.6 percent.

In the month since Trump's victory, investors have sent stock prices surging to record highs and driven up bond yields. The markets have calculated that Republican control of Congress will enable Trump to cut taxes, ease regulations and accelerate infrastructure spending — and that higher economic growth, inflation and corporate profits will result.

The Fed's action Wednesday should have little effect on mortgages or auto and student loans. The Fed doesn't directly affect those rates, at least not in the short run. But rates on some other loans — notably credit cards, home equity loans and adjustable-rate mortgages — will likely rise soon, though only modestly. Those rates are based on benchmarks like banks' prime rate, which moves in tandem with the Fed's key rate. </s> Federal Reserve(WASHINGTON) — The Federal Reserve raised its benchmark interest rate again on Thursday, marking the third hike in six months.

The rate was boosted by a quarter of a point to 1.25 percent.

Following its meeting Thursday, the Fed did not change its forecast and says it still expects to raise rates one more time this year.

“Overall, we continue to expect that the economy will expand at a moderate pace over the next few years,” Fed chair Janet Yellen said.

That’s in spite of a sluggish economic to start of this year, according to Bankrate.com’s Greg McBride.

“At this point, they keep saying that the economic weakness is transitory, it’s going to pass, and raising interest rates at this meeting is consistent with that,” McBride explained.
The U.S. Federal Reserve announces its benchmark interest rate will not change this month, though it expects an increase by the end of the year, along with three increases in 2018 and two in 2019. The Federal Reserve also says its balance sheet reduction program will begin in October.