USA raises rates, but will we see a third hike in 2017?

Ivan Schwartz
June 19, 2017

The Federal Reserve raised interest rates on Wednesday for the second time in three months, citing continued USA economic growth and job market strength, and announced it would begin cutting its holdings of bonds and other securities this year.

The U.S. Federal Reserve, acting as America's central bank, took another step towards normalising monetary policy, by increasing interest rates to a 1% to 1.25% range.

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 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.

USA core inflation, which strips out volatile food and fuel prices, slowed for the fourth straight month, to 1.7% in May, Bloomberg reported on Wednesday. According to the Commerce Department, retail sales fell 0.3 percent in May, which was the first decline since February and biggest drop in 16 months since January 2016.

Japan's Nikkei 225 stock index fell 0.4 per cent to 19,797.46 and South Korea's Kospi sank 0.6 per cent to 2,358.34. The core rate of inflation increased at just 1.7 percent on year, the fourth straight monthly deceleration and the slowest overall pace in two years.

The US Federal Reserve lowered its forecast for inflation but raised its prediction for growth, opening the door for further rates hikes in 2017.

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The Fed now sees the unemployment rate ending the year at 4.3 percent, where it sits currently, rather than the 4.5 percent previously expected.

Officials at the USA central bank also cut their inflation forecast, one of the final indicators to pick up momentum over the past few years. The rise represents the third hike in six months and pushes the key rate to levels not seen since 2008. A local expert says the USA rate hike could actually help Korea resolve its massive household debt problem, which topped a staggering 1.2-trillion US dollars in the first quarter.

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).

Data showed that New Zealand's economy grew 0.5 percent in the three months to March, lower than the 0.7 percent growth forecast in a Reuters poll and well below the central bank's forecast for 0.9 percent growth.

The surprise helped to strengthen the dollar at the expense of the euro.

The pound was down 0.2% at 1.27 United States dollars as the greenback was boosted by Wednesday evening's rate rise, but sterling rose 0.1% against the euro.

However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

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