The US Federal Reserve yesterday kept interest rates unchanged  and said it expected to start winding down its massive holdings of bonds "relatively soon" in a sign of confidence in the US economy.

The Fed kept its benchmark lending rate in a target range of 1% to 1.25%, as expected, and said it was on track to continue the slow path of monetary tightening that has lifted rates by a percentage point since 2015.

In a statement following a two-day policy meeting, the US central bank's rate-setting committee indicated the economy was growing moderately and job gains had been solid.

It also noted that both overall inflation and a measure of underlying price gains had declined – trends which have worried some policymakers – but that it expected the economy to continue strengthening.

"The committee expects to begin implementing its balance sheet normalization program relatively soon," the Fed said, adding that it would follow a plan outlined in June to trim its holdings of US Treasury bonds and mortgage-backed securities.

US stock prices rose following the release of the policy statement while yields on US government debt fell.

The dollar dropped against a basket of currencies.

After pushing rates nearly to zero to fight the 2007-2009 financial crisis and recession, the Fed pumped over $3 trillion into the economy in a bond-buying spree to further reduce rates.

Its balance sheet has grown to $4.5 trillion.

The statement cemented expectations the Fed will announce at its next policy meeting in September the start of its balance sheet reduction plan, marking the end of a controversial tool that drew criticism from Republican lawmakers in Congress.

"The Fed all but told the market the balance sheet run-off will start in September," said Brian Jacobsen, an investment strategist at Wells Fargo Funds Management in Menomonee Falls, Wisconsin.