Financial Shares Climb as Investors Bet on US Rate Rise

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Federal Reserve policymakers say they still expect to hike short-term interest rates one more time this year and three times in 2018, if persistently low inflation rebounds.

The Fed has signaled it will begin to reduce the size of its bond holdings, which grew to $4.5 trillion as part of the "quantitative easing" program launched in the wake of the 2008 financial crisis after interest rates were cut to zero. The yield on the 10-year Treasury note jumped from 2.24% to as high as 2.29% after the Fed's economic projections indicated that most committee members expect to hike rates in December.

As expected the Federal Open Market Committee (FOMC) kept rates on hold at a range of 1% to 1.25%, but also announced it will begin the unwinding of the stimulus programme it began close to a decade ago on hopes the U.S. economy will continue to "perform well". And 2019 remains at 2 percent "because the Fed's inflation forecast is always 2 percent in two years".

"People were surprised that Yellen stuck with the script that weak inflation is transitory so there was some short-covering", said Paresh Upadhyaya, director of currency strategy at Amundi Pioneer Asset Management in Boston.

US benchmark 10-year Treasury note yields rose as much as 2.29 percent, the highest since August 8., while two-year yields rose to the highest since November 2008.

Projections from participants in the Fed meeting showed rising expectations for USA economic growth this year.

Brent crude futures rose $1.15, or 2.1 percent, to settle at $56.29 a barrel, while USA crude futures gained 93 cents, or 1.9 percent, to settle at $50.41. If they do, "it would require an adjustment of monetary policy", Yellen said.

However, if conditions in the economy she did reassure that the central bank could change its course.

At 10:55 a.m. (1455 GMT), an index that tracks the dollar against six currencies.DXY was down 0.2 percent at 92.365.

The US unemployment rate has been at or near a 16-year low of 4.3% since April.

The Fed left rates unchanged for now, as was widely anticipated, but investors' expectations changed for December after the USA central bank signaled one more rate hike by year-end despite recent weak inflation readings.

Financial markets barely moved after the release of the statement and projections.

"In view of realised and expected labor market conditions and inflation, the committee chose to maintain the target range for the federal funds rate at 1 to 1-1/4 per cent, " the Federal Open Market Committee (FOMC) said in a release.

"The market reaction to the Fed has been to lift the probability of a December rate hike to around two-thirds from the 50/50 proposition prices yesterday", said Deutsche Bank strategist Ken Crompton.

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