Dollar bulls awaken as Yellen announces twin tightening

When the Fed first hinted at this move in 2014, central banks in Indonesia and India followed up with rate hikes.

On Wednesday, the Fed said it will begin to unwind that stimulus very gradually.

The announcement marks a milestone in the long recovery from 2008.

The news of the balance sheet wind back had been widely expected from the two day meeting, while the estimate of four more rate rises in the next 15 months was a bit of a surprise. This level will continue each month through December.

For years, the central bank piled up purchases of Treasury and mortgage-backed securities, a strategy meant to stimulate the economy by reducing borrowing costs for everyone.

The Fed has felt confident to raise rates because it appears to have met one of its key mandates: Maximizing employment.

Twelve out of the 16 members of the policy-setting Federal Open Market Committee indicated they expected to deliver a rate increase-the third of the year-by the end of 2017.

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".

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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. The US dollar index rebounded sharply to the 92.3 area this morning, as the FOMC strengthened the outlook of future rate hikes and monetary tightening, as fundamental elements continued to show signs of improvement.

And if persistently low inflation begins to accelerate, the Fed could raise rates more quickly.

But inflation is still running below that target, even though the job market has picked up and other explanations have fallen away. Those selections would afford him an unusual opportunity to impose his personal stamp on the world's most powerful central bank. And she said that, with the mystery of low inflation still unresolved central bankers are prepared to move in any direction depending on how the economy evolves. But economic growth and low unemployment of 4.4 percent are saying it should.

The immediate question is whether the Fed still expects to make one more interest rise this year (assuming they don't hike tonight).

"On a 12-month basis, overall inflation and the measure excluding food and energy prices have declined this year and are running below 2 per cent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance, " it noted.

The Janet Yellen-led Fed acknowledged that the hurricanes' effect will provide a temporary boost to inflation, but that it will still remain below the desired 2 percent in the near term.

The central bank did, however, offer a rosier picture of the overall economy, upping its economic growth forecast to 2.4% from 2.2%.

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