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.
USA stocks pulled back from their all-time highs, though bank stocks cheered the prospect of higher interest rates which should help their profits. There was a chance that the Fed would appear more dovish with respect to the prospects for tightening in 2018 and 2019 but would likely stay the course for a December hike. It has raised that rate three times since December as the economy has gradually improved.
Treasury yield curve flattened to a two-and-a-half month low and world stock markets fell on Thursday as investors adjusted to indications from the U.S.
In July, the core personal consumption expenditure (PCE) index, Fed's favor inflation indicator, rose only 1.4 per cent year on year, below Fed's two percent target and also lower than the 1.9 per cent in January.
US crude oil prices slipped below $50 per barrel but stayed close to multi-month highs as refineries in Texas continued to restart after Hurricane Harvey. But they said the storms would not "materially alter" the country's economy overall.
The other policy decision on Yellen's agenda involves the Fed's so-called balance sheet.
The bank also signalled the possibility of another interest rate hike before the end of the year, though it kept rates unchanged for now.
"It seems the market is holding its breath and waiting for what the Fed has to say regarding the economy and any future interest rate hikes", said Ryan Detrick, senior market strategist for LPL Financial.
That will all be on display Wednesday when the Fed's policy committee announces its next moves and Yellen holds a press conference.
Financial stocks jumped as banks benefit from higher rates. Investors also are looking for indications of when and how central bankers will start selling off bonds bought to shore up economic growth after the 2008 crisis.
"The Fed is being extremely transparent, so they don't want to surprise the market with the normalization process".
In commodity markets, metals shifted lower and oil prices steadied near last week's multi-month highs. It added that the near-term risks to the economic outlook remained "roughly balanced" but said it was "closely" watching inflation.