US Fed raises interest rates

Ivan Schwartz
June 15, 2017

The Federal Reserve raised its key interest rate for the third time in six months, providing its latest vote of confidence in a slow-growing but durable economy. According to their forecast, there will be one more rate hike this year, and three more next year.

In the currency market, the Australian dollar is higher against the USA dollar on Thursday.

The US Dollar to Pound exchange rate traded at around 0.7867.

At the depths of the recession, the Fed began buying Treasury and mortgage bonds to try to depress long-term loan rates. That effort resulted in a five-fold increase in its portfolio to $4.5 trillion.

The interest rate hike "reflects the progress the economy has made and is expected to make toward maximum employment and price stability", Yellen told reporters Wednesday, pointing to job gains and moderate rises in economic activity. As well as the progress of the us economy, investors will be eager to receive an update on the central bank's plan to trim its $4.5 trillion balance sheet.

"For agency debt and mortgage-backed securities, the cap will be $4 billion per month initially, increasing by $4 billion at quarterly intervals over a year until it reached $20 billion per month".

The implementation of its proposed balance sheet normalisation programme – a gradual reduction in Fed's holding of securities - this year, would also depend on how the economy evolves, it added.

"The Fed will be aware that broader monetary conditions which take into account the value of the dollar, bond yields and the equity market have loosened". Yields rise when traders expect inflation to increase, and, therefore, interest rates climb. 2018 forecasts were unchanged.

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Fed is closely monitoring the global economic and financial developments as well as measures of inflation. Neel Kashkari, chair of the Federal Reserve Bank of Minneapolis, wanted to maintain the existing target range for the federal funds rate.

Anna Stupnytska, global economist at Fidelity International, said she expected this to be the last hike for 2017, given emerging headwinds for the United States economy, in particular for consumption, as well as the worryingly weak inflation and wage growth paths.

"The Fed looks to be positioning for a downturn but if inflation continues to underperform this may well be the last hike of the year". The jobless rate stands at 4.3 percent and is expected to fall further.

Gold turned negative after the Fed rate increase. The central bank had pushed rates to near zero in response to the financial crisis. USA shares looked set to open lower, with Dow futures down 0.3 percent and S&P futures off 0.5 percent. At what point does the Fed become concerned?

"The meeting was definitely tilted towards the hawkish side".

Officials worry that keeping rates too low for too long could spark a burst of inflation that could hurt the economy. The unemployment rate declined.

Yellen, the first woman to lead the Fed, is serving a term that will end in February. President Trump has sent mixed messages over the past year about Yellen's performance leading the Fed.

Other reports by GizPress

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