US Fed raises a key rate, signals third hike later

Ivan Schwartz
June 19, 2017

Despite inflation coming in below the Fed's target, the central bank said it would raise the benchmark interest rate by 25 basis points.

Still, the Fed reiterated its federal funds rate forecast on Wednesday, saying it still expects its benchmark rate to reach 1.4 percent by the end of 2017.

However, Yellen said business and household confidence remain quite strong, and echoed the statement from the Fed's policysetting Federal Open Market Committee, which repeated its confidence that the USA economy would continue to expand "at a moderate pace" even with further gradual rate increases.

The Fed also says it expects to begin reducing its balance sheet this year "provided the economy evolves broadly as anticipated".

They lowered projections for 2017 to 1.6% from their March estimate of 1.9%.

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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.

The Fed gave a clear outline on its plan to reduce its $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities, most of which were purchased in the wake of the 2007-2009 financial crisis and recession.

Now the Fed said the inflation will be below its 2 percent target.

The economy grew at a 1.2 percent annualized rate in the first quarter, slowing from the 2.1 percent pace in the October-December period.

Consensus suggests that there will be a third rate hike this year, but Fidelity International global economist Anna Stupnytska is not so sure. The Fed expects that inflation will not hit the current target, of two percent, and it has revealed plans for unwinding the post-asset purchasing balance sheet, which now totals nearly $4.5 trillion. Neel Kashkari dissented the rate hike. Only Neel Kashkari, president of the Minneapolis Fed bank, opposed the increase.

If it truly is indicative of a slowing economy this may put the Dollars at risk of further retreat as it may jeopardize the FOMC outlook of one additional rate hike beyond June, (many investors think the September meeting looks the most likely date for this 3rd hike).

Other reports by GizPress

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