WASHINGTON • The US Federal Reserve left interest rates unchanged on Wednesday, but signalled that it still expects one more increase by the end of the year despite a recent bout of low inflation.
The Fed also said it will begin, from next month, reducing its approximately US$4.2 trillion (S$5.7 trillion) in holdings of US Treasury bonds and mortgage-backed securities acquired in the years after the 2008 financial crisis.
The decision, while widely expected, is nevertheless a significant sign that the Fed is confident the United States economy is out of the woods, and growth and low unemployment will continue.
"The basic message here is: US economic performance has been good," Fed chairman Janet Yellen said at a news conference after the meeting of the Fed's policy committee.
The Fed's retreat from its post-crisis stimulus campaign will be slow but steady, as it prepares to pare back its holdings by US$10 billion per month initially. That is likely to raise borrowing costs for consumers and businesses, but only very slowly.
"The Fed did an extremely good job of preparing us for commencing the balance sheet rundown," said Deutsche Bank chief economist Peter Hooper. "That is happening with a whimper but, handled differently, it could have been a big event."
The central bank's benchmark interest rate will remain in a range of 1 per cent to 1.25 per cent.
The news pushed up the US dollar against major currencies, with the greenback up 0.63 per cent against the Singapore dollar to $1.3525.
US benchmark 10-year Treasury note yields rose as far as 2.29 per cent, the highest since Aug 8.
Asian markets, including Singapore, slipped as traders started to price in the possibility of another rate hike. Shanghai lost 0.24 per cent, Hong Kong edged down 0.06 per cent, Sydney fell 0.94 per cent, while Singapore eased 0.13 per cent.
Forecasts for economic growth and unemployment into next year and beyond were largely unchanged. Gross domestic product is now expected to grow at a rate of 2.4 per cent this year, 2.1 per cent next year and 2 per cent in 2019.
The unemployment rate is forecast to remain at 4.3 per cent this year, before falling to 4.1 per cent next year and remaining there in 2019. Inflation is expected to remain under the Fed's 2 per cent target through next year before hitting it in 2019.